We have all seen and heard the ads that shout, "Secrets banks don't want you to know," "You have a right to settle your debts for pennies on the dollar" and "President Obama has a stimulus plan provision that allows you to eliminate credit card debt" ... if only you will call the 800 number in the ad.
People ask me if there is any truth to the ads with an air of skepticism that always contains a whiff of hope that there just might be some secret way that debts can be erased, eliminated or at least shrunk. I can't blame them. I still buy the occasional ticket when the Power Ball lottery gets big enough, like $15 million is just too small for me to bother with. Well, after 19 years of working with families who have experienced crushing credit card debt, demoralizing reversals of fortune or sometimes just plain unrestrained spending silliness, I can tell you that there is no magic wand, no silver bullet, no credit fairy.
So what's with the ads? Is there a glimmer of truth in them? As with much of life, the devil is in the details. Here's the skinny. Since Roman times, total debt forgiveness has been a persistent myth. The theory is that creditors would rather get back something than nothing. So, faced with a debtor who won't or can't pay, they will agree to a reduction on what is owed. The reality is that debt collectors are tougher than most of us and would rather chew off a limb than lose money. In today's credit world, what the ads are really talking about 99 percent of the time is debt settlement.
Most debt settlement programs require you to make a monthly deposit into a bank or trust account. Once the money gets to a sufficient size, usually 50 percent or 60 percent of the debt owed, the settlement company will contact the lender and offer a lump sum to settle the account.
Here's where the devil comes in. The debt settlement companies charge a fat fee that comes out of your deposits. Usually it is taken from your first deposits before any actual settlement occurs. In the meantime, while you are waiting for the account to get large enough for settlement consideration, the collectors are hammering you. First come the letters, then the calls, then the legal letters and summons. (Yes, you can have your wages garnished while you are depositing money into your settlement account.) Typically, a collector would only consider an offer to settle on an account that is at least six months past due. That's a minimum of six months of collections that you will have to endure and often either the lender won't settle or you give in to the pressure and pay. The debt settlement company gets to keep their fee regardless of results.