I work in a firm that deals with divorce. Every once in a while we have to deal with how to split credit card debt and most times our clients want to know which is an easier or less damaging process. There is a clear difference between the two but my co-workers and I often debate on which way they should go. We hate to outsource to financial planners and/or strategists because then they spend what’s left of their money on fees. I figured I would put this question out there for anyone with an educated answer that we could pass along to our clients. Also, we understand the consolidation process…but what is involved in the settlement process and does the person in debt have to hire an attorney to negotiate?
2 responses so far ↓
1 Debt Guru
There are many different forms of consolidation and each of them have varying effects on your credit rating.
Debt Consolidation Loan - Many people think first of a debt consolidation loan when seeking debt consolidation help. Usually, this is reserved for home owners with equity in their homes that can be tapped to payoff other debts. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one or more loans for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt. There is no credit rating impact with this kind of consolidation.
Credit Counseling - Credit counseling, or signing up for a debt management plan (”DMP”), is a very common form of debt consolidation. There are many companies offering online credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. While most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan DOES show up on your credit report… and, unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy – or using a third party to re-organize your debts. This is typically a good form of debt consolidation help if you have lots of high interest credit card debt and just want a lower monthly payment.
Debt Settlement and Debt Negotiation - Debt settlement, also called debt negotiation, is a newer form of debt consolidation help that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years - so they are a short programs with low monthly payments that can save you the most money while avoiding bankruptcy. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Bankruptcy. The trade-off here is a negative credit rating versus saving money.
Net-net: While there are many forms of debt consolidation help, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation.
2 mss
You don’t need to incur the extra expense of hiring a debt management/consolidation company to settle your clients’ delinquent accounts. Creditors will not make any consessions to them, in fact they would much rather work directly with people who owe the money.
So I would definitely recommend that your clients try and settle their debts themselves. Every case will have its own specifics and will require its very own solution. For example one such specific would be how old the debt is and who is currently handling it. Your clients’ delinquent credit cards can be managed by the original creditor (i.e. the bank that issued the credit card), by a collection agency, employed by the bank, or by a debt buyer, who has purchased your obligations. This is important because each one of them has different settlement guidelines. In other words, you will be able to settle for a different percentage, depending on who you are dealing with. Generally, the lower the chain you go, the lower the settlement you can get. That is not to say that your clients should simply wait and do nothing, in order to get the lowest settlement, because that way they will further damage their credit, which, in the long run will be much more costly.
I would give you some general information and hope that it will be useful. If the account is still at the bank or collection agency (and you will have to differentiate between an agency, which collects for the bank and is accountable to the bank, and a debt buyer, which collects for itself) level, your clients will be lucky to settle it for 80%. If the account is at a debt buyer, you should be able to settle it quickly. Keep in mind that if they had just bought the account within the past month or two, they will not accept anything lower that 60% - 70% of the total amount as a settlement. If they’ve had the account for 3 - 6 months, they will accept a lower settlement, probably you can get it down to 50%, maybe even lower than that. Also, chances are that after 6 - 7 months, they will sell the account to another debt buyer. Make sure, when your clients settle, to get from the creditor a settlement letter, which they will have to send to the credit bureaus to update their credit history.
Great resources to learn more about the credit reporting and credit collection statutes are:
THE FAIR DEBT COLLECTION PRACTICES ACT -, and
THE FAIR CREDIT REPORTING ACT -.
Good luck!