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Case Studies

Antonia is from Pomona, CA and in October 2008 she owed $13,325 to 7 different unsecured creditors. Her average interest rate was 27%. Her monthly minimum payments were $515. Her FICO? score was 482.

A debt management plan was set up for her with a consolidated monthly payment of $417, at an average interest rate of 24 %. Her plan will take 5 years to pay off. After just over a year on the plan, her FICO score? rose to 566.

The concessions granted by Antonia?s creditors lowered her monthly payment by almost $100, and dropped her average interest rate by from 27% to 24%. Plus she?ll repay her entire debt of $13,325 in five years. Also, her credit score rose 84 points after 13 months of making regular DMP payments.

Note: This is an actual Springboard DMP client. The client?s name and possibly location has been changed to protect their privacy. Read More Debt Management Case Studies >>

Debt Settlement Pros and Cons

There are pros and cons to debt settlements that you should consider carefully before making a decision


When is settlement good?

If a collection agency is hounding you about an outstanding debt and you have funds available for a settlement, you may be better off making a settlement offer. If your debt is in collections, chances are your credit has already been damaged, so you might as well settle the debt. The collection agency would have paid far less than the full amount owed to acquire the debt, so your settlement offer will likely be accepted.

If it?s not a collection agency, but rather the original creditor who still holds the debt, it?s less clear that a settlement is a good idea.

In the case of someone trying to collect on a very old debt, one that is out of statute, be careful. Because making a payment on an out-of-statue debt will restart the statute on the debt all over and make it legally valid again.

In any case, if you don?t already have the money available for a settlement, you shouldn?t even consider it. Here is why?

Debt settlement pitfalls to avoid

Misleading marketing tactics: You may noticed that some debt settlement firms avoid mentioning the ?cons? half of debt settlement pros and cons. Commercials and ads for debt settlement present promises of big savings and may fail to mention the negative consequences and risks of debt settlements. If you?ve ever done a Google search on ?debt settlement? you will see for yourself.

Debt Settlement company fees: Professional debt settlement firms usually charge large fees up front, before any settlement negotiations has been provided. They also scale these fees up depending on the amount of debt you owe, even though they don?t have to do any extra work to settle your debt. When these firms use a ?funds accumulation? model, they will collect their fee (many companies charge %15 of your outstanding balance) from your early payments before they begin to accumulate funds for your settlement offer. If you back out, are sued by your creditor, or can?t go forward with the settlement for any other reason, don?t expect to get that money back.

Your debts will increase: every month you don?t pay a creditor, you?ll get new late fees added to your balance. Meanwhile, your interest rate will go to the highest penalty rate in your credit card agreement. So even as you save to make a settlement offer, your balance owed will keep growing.

Credit score impact: A settled debt is a negative mark on your credit report, and will remain there for 7 years. The only negative mark more damaging to your credit rating is a bankruptcy filing.

Tax obligation: Any amount you save from a creditor with a debt settlement will be reported to the IRS as taxable income. For example, if your original debt amount (plus accumulated penalties) equals $11,000 and the settlement successfully makes you pay only $4,400, then the ?savings? of $6,600 is reported to the IRS via form 1099-C as income. That?s one financial obligation you may not have considered.

Collection calls: With modern debt settlement methods, you will be subject to collection calls while you are accumulating funds to make a settlement offer. The collection efforts will only intensify as the months go on and your credit score goes down. Although a settlement firm may issue a Cease and Desist letter to get communication to stop, creditors can still legally contact you when it comes time to take you to court.

Creditor legal action: If you put off your creditor for long enough, and the amount you owe is more than a few thousand dollars, you could find yourself on the wrong end of a lawsuit. This kind of suit is one that you are not likely to win and you may have your wages garnished. The legal judgment against you is an extra negative mark on your credit report.

Success rate: It is tough to find out the actual success rate of debt settlement programs, but bankruptcy attorneys report that they hear from many consumers who wasted time and money attempting a settlement before ultimately being driven to bankruptcy in the end.

In recent news, where ?Approximately 18,000 New Yorkers signed up as customers of [a particular debt settlement company] between its inception in January 2003 and September 2008. [The company] promised a sixty percent reduction in its consumers? outstanding debt, but an average of one percent of consumers received that savings. Many consumers have faced continued harassment and lawsuits by their creditors, despite [the company?s] promise to intervene on their behalf? and has collected approximately $17 million in fees from New York-based consumers.? Source: the Office of the Attorney General, NY.

What to ask your Debt Settlement Negotiator

Disclosure: a reputable settlement negotiator will disclose fully many of the risks of a settlement. They should fully cover the following:

  • The amount you save in settlement from a creditor, if greater than $600, will be reported to the IRS as taxable income.
  • You may be sued by your creditor if you stop making payments.
  • Your debt may be sent to collections after too many missed payments.
  • A debt settlement will have serious negative consequences for your credit report.

If a settlement negotiator doesn?t fully cover those topics with you, consider that a red flag and consider taking your business elsewhere.

Fees: How much does the settlement firm charge? Are the fees charged up-front, or after the settlement negotiation succeeds? Will you still be charged if a successful settlement isn?t negotiated?

Legal action: If you are sued, what will the settlement firm do? Do they have attorneys on staff to help defend you in a creditor lawsuit, or will they simply close your account?

Success rate: What is the settlement firm?s success rate? What happens if you drop out of the program or are forced to declare bankruptcy?

Reputation: What is the settlement firm?s Better Business Bureau rating? Feel free to check their reputation with the FTC or their state?s Attorney General. Also you?ll want to know how long they have been in business.

What are my other options?

If you have debts you need to resolve, but are justifiably concerned about the risks involved with a debt settlement, there are other options you can explore including a debt management plan. A good place to start is with a free counseling session with a certified nonprofit credit counselor who can provide a credit analysis and evaluate your situation at no cost to you and with no obligation. Ask your counselor about safer alternatives to debt settlement.

More About the Safer Alternatives to Debt Settlement »

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