By BOB CUNNINGHAM
You’ve seen the ads plastered all over the internet: “Pay off your debts for a fraction of what you owe!,” or “Consolidate your credit card debt into one, easy monthly payment.”
When you’re deep in debt, credit card debt in particular, it’s easy to fall into the trap of seeking easy answers to suddenly and miraculously rid yourself of that burden. Paying off four and even five figures worth of debt can be daunting, and seemingly impossible to achieve. But as someone who has been there, I can tell you without reservation that you CAN do this on your own, and by avoiding the temptation for radical shortcuts, you WILL be much better off in the long run.
Before we go further, let’s make two separate but related points. 1) There is a moral, ethical obligation to pay all of an owed debt. You borrowed the money, you should be willing to pay it back 100 percent (plus reasonable interest), 2) We will not be discussing bankruptcy here, because that is literally NEVER your best option, regardless of what some attorneys claim.#
#To reinforce my disclaimer that comes at the bottom of every post I write, this statement is an opinion only, and is NOT intended to be taken as specific legal advice. I am a financial coach and licensed life insurance agent. I’m not an attorney.
There are, however, two somewhat radical yet more industry-accepted measures that can be taken for those in deep debt: Debt Consolidation, and Debt Settlement.
Consolidation refers to hiring a company which specializes in the reduction and eventual elimination of unsecured debt. The company helps you organize your debts and can negotiate on your behalf with the credit card companies for reduced interest rates, 0% periods to help you pay your debt down more quickly, and can arrange to take in your payments and then forward negotiated payments directly to the creditors. Let’s be clear: Consolidation companies help you with something you can readily do on your own, and charge you a monthly fee for the service. But in certain circumstances, they can be of some assistance.
However, there are two primary negatives with working with a consolidation company. First, as I just indicated, they’re not really providing any service that you couldn’t do on your own with a little effort. You can call your creditors and ask for rate reductions, or request to have payments lowered and spread over a longer time frame in an effort to stay current.
The second downside is that signing up with such a company usually will be reported on your credit report, and can take as long as seven years – from the date of your final payment made to/through the consolidation company – before it is expunged from your record. This information can lower your score and, thus, make it more difficult to qualify for more beneficial types of financing such as a home mortgage.
In most instances, consolidation is unnecessary and not helpful enough to justify the price – in terms of the monthly fee (typically $35-$75 monthly) or the detrimental credit hit.
Debt settlement is a much more aggressive strategy in which you’re essentially hiring lawyers to negotiate discounted settlements of the debt. Say you owe Capital One $8,000, and you have no feasible way of keeping up with the minimum payments, and certainly no chance of paying more than the minimum in order to pay the balance off anytime soon. The company might approach Capital One on your behalf and offer to pay a flat $4,000 within the next 30 days in order for the entire debt to be forgiven. This is referred to, should Capital One agree in our example, as a “charge-off.”
Hold on!, you may be saying. You’re telling me I can pay off an $8,000 debt for just $4,000? Where do I sign?
Yes, it may sound like a Godsend, until you really peek under the hood of how this engine functions. First off, where are you going to get the $4K to pay off the account within 30 days? If you’re hoarding cash, you should have already used it to pay down your debt. Assuming you don’t have that kind of scratch available, you’d have to turn around and borrow it from someone else. How, in the name of sound financial planning, does that eliminate debt?
Another problem is that in most cases, and depending on the state where you live, that $4,000 “discount” on what you owe is recorded as income for you for tax purposes. You would be liable for income tax on $4,000 at the end of the fiscal year… on money you never actually saw. Be sure to consult with an accountant or tax attorney for specific details on your situation.
And the settlement company needs to get paid. Want to know how? By charging you a percentage of what they save you, sometimes as much as 25 percent according to Experian.com. In the above example, that means $1,000 of the $4K discounted off the Capital One balance would be paid to the settlement company.
Also, the knock on your credit report for charge-off’s is significantly worse than just utilizing a consolidation company, and can take a decade to come off your report, says FairIsaac.com.
And didn’t I already mention the audacity it takes to justify paying less than what you actually, legitimately owe? Sure, the credit card companies are rolling in it, and they often charge ridiculously high rates of interest. Won’t hurt them much to contribute a little back to the common folk, right? Perhaps, but it still ain’t right to pay $4,000 for an item you agreed to pay $8,000 for. Period.
The truth is that you do not have to resort to such drastic measures, nor should you. A little common-sense planning and spending reduction, following the advice of this blog and others like it that propose you handle your own issues prudently, and you can escape your debt much more quickly than it may seem now.
Forget consolidation, settlement, and other non-traditional methods. Do the right thing, and pay your debt off as quickly as you can using good, savvy savings strategies. You’ll feel a lot better about it, AND be fiscally better off as well.
DISCLAIMER: This post represents the author’s opinions only. In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment. Results are never guaranteed. Utilize the information as you see fit, make all money decisions at your own risk.