Dear Debt Adviser,
I take home $9,000 per month, but pay $2,500 to my credit cards. I can’t continue to pay my credit card bills. I am thinking I might stop paying and try to settle. Will it hurt me that I have gainful employment?
— Dan

Dear Dan,
Of course you can pay your credit card bills. You just have to dedicate about $3,000 of your $9,000 of income to debt repayment instead of what you are currently spending it on. With a salary and credit card debt in excess of $100,000, the problem is clearly that your spending is out of control. Whatever the reason for this may be, where there is income, there is hope!

I don’t like to be negative, but I can’t imagine a creditor settling your account for less than you owe if you have a source of income that can be garnished and, most likely, assets that can be attached. To be fair, there are a lot of misleading ads running right now that have people erroneously thinking they can just settle debts and walk away scot-free. Some debt settlement companies even say that you have a right to settle debts for less than you owe, like it’s a new government entitlement you just need to apply for.

For the record, let me tell you that debt settlement is a very bad idea on any number of levels. First, it almost never works. Even if you had no income or assets, which you do, your lenders would want a lump sum of about 60 percent very quickly, which you don’t have.

3 points to consider in debt settlement
  • Debt settlement rarely works.
  • One option is to adjust spending and pay in full.
  • If you need help, hire a lawyer instead of a settlement firm.

Most creditors are not going to be willing to settle for less than the total balance due unless that account is more than 90 days past due. Don’t expect your creditors to simply sit back and allow you to stop paying without comment. You should be prepared for many attempts to contact you regarding payment. The more time that passes, the more aggressive you can expect the collection attempts to become. Creditors do not settle quietly. They have armies of collectors, lawyers and bad-debt buyers who believe they are better at making you pay than you are at convincing them to take less than you owe.

But wait, as the great infomercial guys say, there’s more. Settling will not only ruin your credit, but it may increase your insurance rates, possibly keep you from getting a promotion at work or a new job if laid off and, generally, complicate your accessing credit for a car, home or apartment for several years to come. Phew! And that’s just the obvious fallout!

I believe the answer to your problem lies in reordering and redirecting your spending. Most people could benefit from a thorough review of their finances, and you certainly are among them. What I’d like you to do is determine what has caused your finances to get off track. In order to do that, I want you to write down all of your expenses for the next month. Include expenses that come up periodically like insurance or taxes.

Once you have a good idea of how you are spending your monthly income, then I recommend that you adjust your spending to free up enough cash to pay down the credit card debt faster and avoid settling. If you are married or have a significant other living with you, be sure to include your partner in the conversation.

However, I have noticed over time that not everyone takes my advice or that there may be extenuating circumstances I don’t know about, so should you decide to settle, I suggest you use a local attorney to negotiate with your creditors and advise you. This may seem expensive, but it will be cheaper than dealing with a debt settlement firm that doesn’t deliver. A local attorney subscribes to a strict ethical code, can give you good advice and can represent you if the lender sends your case to their collection attorneys.

Good luck!

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