Skip debt settlement; it can backfire

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Dear Debt Adviser,
I am so far overextended that I don’t see any way to pay off my credit card debt. I am only able to make minimum payments, which are barely more than the interest on the card. I have been in contact with a debt relief company and the people there say they can work with my creditors and reduce my amount of debt and have me debt-free in 42 months. It sounds wonderful (sounds too good to be true!).

After reading the contract’s fine print, I am concerned that I will end up in worse shape. It looks like they will allow my accounts to go really delinquent in order to make a deal with the creditor to reduce the balance. It states that they are not responsible for additional fees or legal action taken by the creditor. I’m afraid I will put my trust in them and they will try, but it may not work and I may end up owing all the debt plus additional late fees, interest, and possibly collection fees. Is there any way out?
— Debbie

Dear Debbie,
Your “debt relief” company sounds like debt settlement to me. You were smart to read the contract. The approach taken by many settlement companies is for you to stop making payments to your creditors and instead, make payments to them until the debt settler believes your credit card issuers are desperate and willing to settle for less than is owed. The major problem with this approach is while you are paying the debt settlement company and not your creditors, your credit is ruined. Collectors can and will take advantage of all collection options from phone calls to letters to court summonses and in the vast majority of cases, the attempt to settle with your creditors does not work, leaving you worse off and on your own, according to a representative from the Federal Trade Commission.

You say that you can make the minimum payments on your cards. That’s a good start. What I’d like to see is for your minimum payments to be applied more to principal and less to interest. I suggest that you contact your card issuers and ask for a reduction in interest rates. As simple as this seems, it can be enough for you to get a break. Be prepared to answer some questions, like why you need a reduction or what you can afford to pay. Having a thought-out response ready will help here. If an event has precipitated a crisis, like a salary reduction or job loss or illness, tell them. Be as candid as you feel appropriate or comfortable. The more information they have, the more likely they are to understand your situation and offer a solution that fits your need.

You may get some concessions for six months, some for a year and some not at all. If half of the card issuers give you a break, this will begin to allow you to whittle down those balances much faster. Next, I want you to commit to looking for ways to put more money in the mail each month. I suggest that you make a New Year’s resolution to put at least 50 percent of all new money you get in 2010 toward paying your cards. That’s half of any raise. You are already living on your current income, so a raise is money you may deserve but really don’t need. I want you to use half of your IRS refund, bonus, extra commissions, birthday checks or other windfalls to reduce your balances. You will be surprised how fast this will snowball and get you out of debt.

If that fails, I suggest you check out a nonprofit credit counseling agency that is a member of the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling. You may qualify for a debt management plan, which would allow you to pay what you owe in three to five years. Be sure you review any debt management plan agreement carefully and have all fees explained to your satisfaction before signing.

Lastly, if you feel the need to settle your debts, I suggest that you use your attorney to negotiate on your behalf. They have strict ethics standards, despite all the legal jokes, and you will probably get some expert legal and personal advice in the bargain. Don’t settle for less.

Good luck!

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