Consumer Law

Debt Settlement: An Idea Whose Time has NOT Come?

By Jonathan Ginsberg

In the course of corresponding with folks contemplating bankruptcy, I frequently get emails and calls asking about debt settlement.  A recent letter got me thinking about debt settlement and I was inspired to create a post on my Atlanta Bankruptcy blog entitled “Debt Settlement vs. Bankruptcy” in which I set out my observations about the debt negotiation process.   I encourage you to read this post in its entirety but here are some of the salient points about debt negotiation:

• you will need cash to make a settlement work.  Settlements of debts will range between 25% to 70% on the dollar.  If you are able to negotiate a settlement you will need to forward the lump sum directly to the creditor or creditor’s representative.  Do not expect any payment plans in the debt settlement process.
• you will need to follow a procedure whereby you receive unambiguous written documentation of the settlement before you tender money.   If you do not document your negotiations and final resolution, you may very well end up facing renewed demands for money after you finalize your settlement and issue your lump sum.   Any ambiguity in the terms will come back to haunt you and a verbal deal is useless.
• you will have a great deal of difficulty finding a live person with authority to speak to you.  Credit card companies and collection agencies intentionally make it difficult for you to reach a person in authority.  They know that if they can keep you on the phone for hours, waiting to speak to a “manager” or on hold you will grow frustrated and less demanding.   I have written before about the psychology of debt collection and I can assure you that the executives who set up the procedures to settle debts use every trick in the book when it comes to maximizing their recovery.
• if you have multiple accounts, credit card or otherwise, you will find it exceedingly difficult to manage simultaneous negotiations.   Creditor “A” does not care about your dealings with creditor “B” and if you have a finite pot of money, you will find that every creditor wants as much as it can get without regard to your reality.   The phrase “herding cats” comes to mind.
• debt negotiators will pressure you to move fast.  They will offer a deal but insist that the money be wired to them within a few hours.   This is part of the psychology being used against you and is designed to increase your stress and result in a better recovery for the creditor.
• not every lender will agree to negotiate at all.  Some credit card companies, for example, may offer a 10% reduction but that is it.  They would rather sue you than work out a deal.
• your best window for negotiation often occurs when you are three to four months delinquent.  Most credit card lenders will not talk to you if you are current.  This means that you will have to endure two to three months of daily phone and letter harassment before you can even start a meaningful negotiation.
• many of the debt settlement companies you hear advertise on the radio or TV are ripoffs.  Some are outright fraudulent while others charge a large up front fee and do little more than a legitimate agency like Consumer Credit Counseling (which, by the way, is funded by the credit card companies).

Another point that I did not include in my blog post comes from Michael Schreiber of MainStreet.com - when a credit card lender does reduce your balance or change the terms of your loan, such a modification has a significant derogatory effect on your credit score.

The bottom line: I am not convinced that there is any legitimate interest by large credit card issuers to engage in any sort of meaningful negotiation with debtors.  Despite all the talk, the Congressional testimony, the pseudo-helpful web sites in soothing colors, the overriding goal of credit card companies is to extend just enough credit to you so that you will keep an outstanding balance to accrue finance charges, and to periodically make a late payment to generate late fees.

Full post as published by Credit Law Network on June 21, 2009 (boomark / email).