New York Times on Debt Settlement: Another Perspective

An article today in the New York Times warned about the
perils of debt settlement, and a number of comments were posted in response. I’d
like to add mine.

As a consumer educator for 22 years, I first
shuddered when I heard about debt settlement. In fact, I recall writing an
article about ten years ago where I said it was quite possibly the worst idea
ever…Don’t pay your debts? Let them go delinquent? How could that ever help you solve a debt problem?

Unfortunately, though, I’ve had to change my tune. I am
still opposed to the approach that many settlement companies are taking where
they charge high upfront fees regardless of whether they help consumers, and
I appreciate the warning about them in the article. But I don’t rule out
settlement all together as a legitimate option for some consumers who are buried in bills.

Debt settlement has become popular because while consumer
debt has increased, options for resolving that debt have contracted. Bankruptcy
has become more difficult for some people to file, as Ben describes in his
comments on the New York Times article. And credit counseling typically requires debtors to pay
back 100% of their debt plus interest, often at double-digit rates. That simply
doesn’t provide enough relief for them to dig themselves out from debt.

(Fortunately, new payment plan terms agreed to by the National
Foundation for Consumer Credit and top creditors will allow more people to pay
off their debts through reduced payments in a Debt Management Plan. This should
make counseling a better option for more consumers. I’ll write about that in a
separate post.)

In addition, most people I talk with have absolutely no
desire to file for bankruptcy. They want to pay their debts back, but they
cannot pay the full amount. They, too, often turn to settlement as a way out.

In an ideal world, borrowers should be able to negotiate
directly with their creditors. However, when someone owes multiple creditors
(as most people do when they are deeply in debt), each creditor will do its best to be at the top of the pile. The
stress and pressure that causes can be impossible to handle for someone who is
already struggling financially. I’ve spoken to people who are trying to pay as
much as they can, but the calls are so constant that they fear they will lose their
jobs. Others are suicidal. It only takes one creditor who is especially aggressive to push a borrower over the edge.

In writing my new e-book Reduce Debt, Reduce Stress, I
interviewed several debtors who successfully completed settlement programs and
were thankful that option was available to them because it allowed them to avoid
bankruptcy. (Each owed too much to be able to complete a credit counseling
program.)

In a comment on the article, Sudhir recommends that consumers
check with the Better Business Bureau before choosing a settlement company.
Unfortunately, however, the BBB does not recognize settlement companies as legitimate options
and does not provide top ratings for settlement companies, even if they generate no complaints (and pay the membership fee).

However, I agree that consumers must be extremely cautious about
choosing a settlement company to work with. These programs are not painless. Your
credit will be ruined for a while because you stop paying, you could be sued,
and there can be tax implications. Hang up on any company that makes settlement
sound like an “easy, guaranteed” program to pay off your debt. You can read my
Fourteen Questions to Ask a Settlement Company and use them to help you choose
the right settlement partner.

And I also strongly recommend talking with a credit
counseling agency to find out whether that may be the right option. Even if you
have talked with one recently, you may want to try again, as the payment
requirements are easing. Don’t be worried that counseling will affect your
credit the same as bankruptcy. That’s not true anymore. FICO has changed their credit scoring model: When they calculate credit scores, they now ignore the fact that a consumer has gone through credit counseling. If you can pay back your debts through a Debt
Management Program (DMP), do so.

I also recommend that you talk with a bankruptcy attorney who can
help you evaluate the bankruptcy option. There are many wrong assumptions about
bankruptcy floating around, including the notion that you can’t file if you
make too much money. Only an attorney can give you the straight scoop on
whether filing makes sense for your situation.

Finally, go in with open eyes. With settlement (like
everything else), if it sounds too good to be true, it probably is.

Gerri Detweiler
– Personal finance author and Credit Advisor for Credit.com. Gerri
contributes budgeting, debt recovery and savings information online.
She is also the co-author of the e-book Reduce Debt, Reduce Stress: Real-Life Solutions for Your Credit Crisis

Gerri Detweiler Credit.com's Personal Finance Expert, Gerri focuses on financial legislation, budgeting, debt recovery and consumer savings information. She is also the co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights, and Reduce Stress: Real-Life Solutions for Solving Your Credit Crisis as well as host of TalkCreditRadio.comTalk Credit Radio. Reach Gerri at creditexperts@credit.com.