Debt Consolidation/Relief Part 1 of 2

Hardly a day goes by without seeing on television, or hearing on the radio, a commercial for “debt consolidation” or “debt settlement” services. Often, the ad includes a statement to the effect that if you owe more than $10,000.00 in credit card debt, you have the “legal right” to settle for less. Further, we frequently see clients who have paid hundreds or even thousands of dollars to a debt consolidation or debt settlement service, in exchange for absolutely no debt relief.

If you wish to explore the possibility of settling your debts for less than what’s owed, here are five essential things to consider, based on our experience as bankruptcy attorneys and attorneys working in other areas of debtor/creditor relations:

No minimums required

1. Anyone, at any time, regardless of the amount owed, has the right to try to settle a debt for less than what’s owed. Advertisers referencing some sort of minimum amount of debt (such as $10,000.00 in credit card debt, as previously mentioned) are simply trying to attract the more indebted because they are likely to be more desperate and more willing to pay a higher fee to the advertiser.
2. You can negotiate and settle your debts yourself, without legal representation and without the help of some sort of agency or company.
3. If you decide to hire someone to help you settle, consolidate or otherwise manage your debts, then be very wary of companies that are advertising. Most of them draft various fees from your checking account and provide absolutely no services, and most of them are actually owned and operated by credit card companies! At a minimum, consult an agency that is non-profit, and in good standing with the Better Business Bureau, and a member of the National Foundation for Credit Counseling.  We suggest Consumer Credit Counseling Services which meets each of these criteria.

Timing is everything

4. Most (if not all) credit card companies will have no interest in negotiating a settlement of the balance owed for less than full value until the borrower is at least 30 to 60 days past due. You may be able to negotiate a lower monthly payment, or a lower interest rate, on either a trial or permanent basis without being in default, but the credit card industry generally has no incentive to forgive any of the balance owed so long as the borrower is current, or relatively current. If you make the conscious decision to go into default on a credit card with the goal of negotiating settlement of the total debt for less than full value, then understand that the default will negatively impact your credit score and likely result in the imposition of the default rate of interest (we’ve seen as much as 30% APR) and various default fees.
5. There is never any guarantee that a credit card company will agree to settle for less than the full balance; however, many — if not most — eventually do. In our experience, the creditor requires such settlement payments in no more than four monthly installments; in other words, the negotiated total credit card settlement cannot stretch beyond four months. Ideas of settling for less than full value in several monthly installments are simply unrealistic.

Stay tuned for Part 2 of this series