Although I am a bankruptcy lawyer, I tell everyone who visits my office for a consultation the same thing: “bankruptcy is a last resort – do not file for bankruptcy unless you have no other choice. It will damage your credit and negatively affect your financial future for months or years to come.”
What, then, are the alternatives to bankruptcy if you are struggling with out-of-control debt?
One of the best known but least understood solutions to debt is known as “debt settlement.” In general terms, debt settlement refers to a process by which you or a representative negotiates with a creditor for:
- a lower balance/forgiveness of debt
- a reduced interest rate
- a reduced monthly payment
- some or all of the above
Unfortunately it is easy to speak of debt settlement in the abstract – as always “the devil is in the details.” Here are my observations:
- debt settlement is possible. I have negotiated on behalf of clients to reduce balances, monthly payments, and interest rates. Others have done it as well. A few months back I began corresponding with a filmmaker named Kenny Golde who built up a great deal of credit card debt financing a picture he was directing and who was able to negotiate a settlement of most of his debt. Kenny is also an enterprising entrepreneur and he wrote a book about his experiences called Settle Your Credit Cards. Available directly from the author as a download costing $19, Kenny’s discussion of the debt settlement process is required reading for anyone who is thinking about wading into these waters.
- you will need cash to make a settlement work. Settlements of debts will range between 25% to 70% on the dollar. If you are able to negotiate a settlement you will need to forward the lump sum directly to the creditor or creditor’s representative. Do not expect any payment plans in the debt settlement process.
- you will need to follow a procedure whereby you receive unambiguous written documentation of the settlement before you tender money. If you do not document your negotiations and final resolution, you may very well end up facing renewed demands for money after you finalize your settlement and issue your lump sum. Any ambiguity in the terms will come back to haunt you and a verbal deal is useless.
- you will have a great deal of difficulty finding a live person with authority to speak to you. Credit card companies and collection agencies intentionally make it difficult for you to reach a person in authority. They know that if they can keep you on the phone for hours, waiting to speak to a “manager” or on hold you will grow frustrated and less demanding. I have written before about the psychology of debt collection and I can assure you that the executives who set up the procedures to settle debts use every trick in the book when it comes to maximizing their recovery.
- if you have multiple accounts, credit card or otherwise, you will find it exceedingly difficult to manage simultaneous negotiations. Creditor “A” does not care about your dealings with creditor “B” and if you have a finite pot of money, you will find that every creditor wants as much as it can get without regard to your reality. The phrase “herding cats” comes to mind.
- debt negotiators will pressure you to move fast. They will offer a deal but insist that the money be wired to them within a few hours. This is part of the psychology being used against you and is designed to increase your stress and result in a better recovery for the creditor.
- not every lender will agree to negotiate at all. Some credit card companies, for example, may offer a 10% reduction but that is it. They would rather sue you than work out a deal.
- your best window for negotiation often occurs when you are three to four months delinquent. Most credit card lenders will not talk to you if you are current. This means that you will have to endure two to three months of daily phone and letter harassment before you can even start a meaningful negotiation.
- many of the debt settlement companies you hear advertise on the radio or TV are ripoffs. Some are outright fraudulent while others charge a large up front fee and do little more than a legitimate agency like Consumer Credit Counseling (which, by the way, is funded by the credit card companies).
My conclusion is that debt settlement is possible but it takes a lot of work and a great deal of intestinal fortitude. It is probably a task best handled by a third party representative, but lawyers are expensive and legitimate and cost-effective debt settlement companies can be difficult to find. I would like to see some sort of independent arbitration or mediation entity created that could pre-qualify debtors and then get every creditor into a room to hammer out a deal. At this point I don’t see any real desire on the part of credit card lenders to formalize or publicize debt settlement so for the time being it is every man for himself.