By: Jeena Cho

Q: I’ve had my hours reduced at work and no longer working overtime. To make ends meet, I’ve been using my credit cards. I have about $30,000 in credit card debt, paying very high interest rate (hovering around 30%). I have five cards. My parents offered to loan me $15,000 from their savings. Can you help me settle my debt? I don’t want to file for bankruptcy.

I get questions like this all the time. Clients wanting to borrow money from family and friends to pay off or settle credit card debts. Usually, the question is prefaced by “I read on Google…” or “My friend told me…” I cringe every time someone says this because I’ve met too many clients who has tried this strategy, failed and comes in to file for bankruptcy anyway. Now, in addition to listing Chase, Discover, American Express, etc. on his or her bankruptcy petition, the client has to add the family member or friend on the petition too.

To make matters worse, if you’ve repaid your family or friend before filing the bankruptcy, he or she may be considered an “insider.” This means that the Trustee in your case can potentially demand the money back from your family or friend! That sure makes for an uncomfortable conversation at the dinner table.

The reason why debt settlements generally don’t work is because it’s difficult (if not impossible) to get all of your credit cards to play ball. You might be able to settle 4 cards, but what if the last card holds out? Or decides to sue you instead? How about taxes? Do you have enough money set aside for taxes on the forgiveness of debt? (That’s right. Whatever the credit cards forgive, will be attributed as income to you.) Don’t make the mistake of throwing your family or friend’s good money after your bad credit card debt.

Debt settlement can work in some cases where the client has 1 or 2 creditors and has lump sum cash to settle. For more information on debt settlement, read our Guide to Living Debt-Free/ Bankruptcy and Other Alternatives.

Have you tried debt settlement? Did it work out for you? Please share your story.

Image Credit: futurowoman

By: Jeena Cho & Jeff Curl

Are you contemplating bankruptcy? Do you have questions? Download our free guide.

Topics Covered:

1. You are not alone.
2. Consequence of inaction (what if I do nothing?)
3. You may qualify for Chapter 7
4. Can you keep your property in Chapter 7?
5. Chapter 13 vs. debt consolidation
6. Who will find out about your bankruptcy?
7. Can I afford bankruptcy?
8. Truth about credit counseling
9. Getting new credit after bankruptcy
10. What’s your “exit strategy?”

Click to download.

By: Jeena Cho

As a society, there are two things we don’t talk about. Death & Debt. Frequently, when people are experiencing financial distress, they go into denial mode. Instead of assessing their situation and tacking the problem, they deny thinking something will change. Of course, debt problems do not get better without proactive action. It gets worse. Interest rates continue to rise, you borrow from Peter to pay Paul.

If you are experiencing financial trouble, you should seek help. Go see a financial advisor, reach out and ask a friend or a family member. You will soon find that you are not alone in your problems.

For those of you that do not see any hope of being able to reduce your debt, we are offering a free seminar. If you do not want to attend in person, you can attend on the Web. It’s totally confidential. We’ll discuss the different options to deal with your debt including debt settlement and bankruptcy.

Our goal is to educate you with the options available.  One of the most frequent comment I get at the end of a consultation is “I feel so much better” or “I should have come in a long time ago.” We hope to do the same through these workshops.

For more information or to register, go to http://www.jclawgroup.com/workshop/

By: Jeena Cho

Debt settlement companies are running their ads everywhere – “Settle your debts for pennies on the dollar.” “Government sponsored debt settlement plan.” “We have special programs with the credit card companies to settle your debt.” The truth of the matter is that there is nothing that a debt settlement company will be able to do for you that you probably could not do yourself. Just in the last month, I met with at least 6 clients who has been scammed by these so-called debt settlement companies.

Here’s a run-down on how debt settlement companies work:

1. Instead of paying your credit card, you make monthly payments to the debt settlement company. (Generally, a fixed amount.) You will be required to stop paying your credit cards.
2. The debt settlement company almost always receive their fees upfront. In another words, not a single dollar may be going towards actually settling your debts for months.
3. After you have accrued sufficient funds, the debt settlement companies will offer to settle your debt with your creditor.

Here’s what the debt settlement companies won’t tell you:

1. Credit card companies are under no obligation, what-so-ever to accept any offers. There is no special government backed program. They do not have “special” relationships with the credit card companies.
2. Frequently, especially with Chase and Bank of America, they will simply choose to sue you.
3. If you are sued, the debt settlement companies will not defend you. To litigate a civil case can cost tens of thousands of dollars. The debt settlement company is not going to pay your attorney fees.
4. 1099-C. If the debt settlement company is successful in negotiating the debt, the amount forgiven may be taxable to you. (For example, if you had $100,000 in credit card debt and it’s settled for $50,000, you will owe taxes on the $50,000 that is forgiven. If you are in the 15% tax bracket, that will mean you will owe Uncle Sam $7,500.)
5. Many debt settlement companies are scams. That’s right. For more information, go to the FTC website.

If you have money to be able to settle your debt, you can try the following.

1. Contact the lender directly. Unfortunately, most credit cards won’t deal with you until you’ve been behind on your payment. Non-payment will mean your credit score will suffer.
2. Considering offers. In general, once you fall behind on your payments, credit card companies will send you settlement offers. (They may also sell or transfer the debt to a third party collection agency.) The more you can offer in one lump sum, the better the deals will be.
3. Ask for it in writing. Any offers should be verified in writing. Ask the creditor to send you in writing the offer you will sign.
4. Paying the settlement. NEVER EVER send the settlement check out of your personal checking account. Why? Because, you do not want them to have your checking account number, which they can use to draw money out of if they are successful in winning a lawsuit against you. You should always send the settlement money in money order or cashier’s check.

Word of caution. In order to settle your debt, you need cash. I frequently meet with clients who does not have any disposable cash that insist on settling their debts. Before you spent what little cash reserve you have, or liquidate your assets, sit down and plan out an exit strategy. Ask yourself, “how much debt do I have?” and “how much can I possibly save to get out of debt?”

Disclaimer: The information contained in this article is informational in nature and is not a substitute for legal advice. Consult with an attorney for advice on your particular circumstances.

Posted: Friday, June 26 2009 at 05:00 am CT by Bob Sullivan

Like anyone with a radio or TV, Lorena Altamirano heard the ads promising quick and painless debt relief. If there was a way to settle her debt for 50 cents on the dollar, she sure needed it.  A recent divorce had led to a nasty financial surprise: Her ex-husband’s unpaid bills had pushed her almost overnight from having virtually no debt to being $17,000 in the hole.

“I was paying everything perfectly, no problem, until the divorce,” she said. “Then the skies fell on me. These were bills he never told me about.  We were married and I was responsible, but that put me totally out of balance.”

Altamirano still had a decent job as a benefits claims processor, but she was now living paycheck to paycheck.  With a son in college, and $1,600 a month rent for her San Mateo, Calif., apartment, she had nothing left at the end of the month to pay down the debt. The interest rates on her credit cards climbed, and the late fees started to pile up.

A friend had enjoyed great success with a debt consolidation loan, so Altamirano started researching debt workout plans on the Internet.  She quickly found Debt Remedy Solutions in Boca Raton, Fla., and sent an inquiry.  The response seemed like an answer to her prayers.

“We are generally able to settle debts for about 40 cents on the dollar and have our clients debt free in a very short period of time on a low monthly payment plan,” said the letter, which Altamirano provided to msnbc.com. “We charge the lowest fees in the industry.”

Like most Americans with debt trouble, Altamirano knew nothing about the fast-growing debt negotiation industry, and did not understand the important distinctions between debt consolidation, credit counseling and debt settlement. She believed she was simply entering a payment program that would lower her interest rates and help her climb out of the hole she was in.

She missed the reference in the pitch letter she received – “We are generally able to settle debts” – that indicated she was about to trust her finances to a debt settlement company. She signed up, and began sending $200 a month to Debt Remedy solutions. A year later, the answer to her prayers had become a nightmare.

Rogue industry

In May, New York Attorney General Andrew Cuomo announced an investigation into the debt settlement business, calling it a “rogue industry.” Among the 10 firms that received subpoenas from Cuomo’s office was Debt Remedy Solutions. Unfortunately, that came too late for Altamirano.

There are perhaps 1,000 firms that offer debt settlement services, according to the industry’s lobbying group, The Association of Settlement Companies (TASC). About $20 billion in consumer debt is currently enrolled in debt settlement programs, according to the association.

Ads for debt settlement companies are ubiquitous, and nearly always use the same pitch: Consumers have the “right” to have their debts reduced by 50, 60 even 70 percent, the ads say, promising information that “credit card companies don’t want you to know.”

But as Altamirano discovered too late, there also are things the debt settlement companies don’t want you to know.

For help understanding how these firms work, msnbc.com interviewed Ray Hardy, who said he recently quit working for a debt settlement company after becoming frustrated with its business tactics. He did not wish to identify the company, but provided intimate details about the industry’s tactics during several conversations with msnbc.com.

The dark side

The basic strategy these firms employ is to instruct consumers to stop paying creditors. Instead, they are told to save money in a separate account.  After receiving nothing for many months, the settlement companies say, lenders will be happy to take a lump sum payment for far less than the total debt.  Sometimes, it works.

The problem for consumers is that high up-front fees — and additional monthly fees — often mean they have very little to offer creditors after six months or a year in the program.

“The program takes time, we have to get the credit card companies to think they will never see a dime, then approach them with the 50 percent offer,” Hardy said. “The dark side of debt settlement is that most clients could not pay their monthly credit card bills and now we are asking them to send money to our company on a monthly basis.  Most of the money paid during the first year goes toward the fees and most clients who agree to debt settlement give up after less than a year.  So the company will collect some monthly amount from them for one to 12 months, offer no service whatsoever and not a penny paid goes toward getting them out of debt.”

That’s precisely what Altamirano said happened to her.  She agreed to pay more than $200 as month to Debt Remedy Solutions in early 2008. She says she was told that in 120 days, the firm would begin settling debts with her creditors. She was also told that collection calls and threatening letters would stop.

But as months rolled by, and she continued making payments, the threatening calls didn’t stop. In fact, they increased.  Then, phone calls and letters to Debt Remedy went unanswered.  After 300 days, and $1,850 in payments, she stopped paying the firm.

“Nothing had happened,” she said. “And now things were much worse.”  Her debt had spiraled upward to nearly $25,000. After numerous complaints to the company, she was offered a refund — of $100.

Altamirano has filed complaints with the California state attorney general’s office and state banking regulators, but so far, she has gotten no relief.

“They did not do anything for me and stole $1,857 from my checking account,” she said. “It’s tricks everywhere.  The problem is there are so many people in this situation. They are having a feast with us.”

Debt Remedy Solutions disputes Altamirano’s account.

“We made every effort to work with this customer,” spokeswoman Erika Papp said in an e-mail. She declined to answer specific questions about Altamirano’s account, but said that her story was investigated by the Better Business Bureau and Florida state officials, who rejected “rejected this customer’s complaint as unfounded and without merit.”

But a spokeswoman for the Florida Department of Agriculture and Consumer Services, which sent a letter dated June 11 to Debt Remedy Solutions that Papp provided to msnbc.com, disputed her characterization of the agency’s finding

“We have not sided with either party,” said Sophie Campfield, a program administrator at the agency. “We have merely acknowledged  that the company responded to the complaint. It does not mean we agreed with what they said.”

Papp also said Debt Remedy Solutions was complying with the New York attorney general’s subpoena, “and we are working hard with his office to explain the work we do and assist his efforts in trying to understand our industry.”

Big fees, small benefits

Hardy, the former debt settlement worker, said debt settlement companies rack up charges against consumers in numerous ways. For example, he said, while the money saved for eventual debt repayment is held in an outside bank account, there are often fees associated with that.  After all the fees are added up, there’s often very little benefit to the consumer — even if the credit card company agrees to a 50-cents-on-the-dollar offer, he explained. A consumer with $10,000 in debt would eventually pay nearly $4,200 in fees by the time commissions, up-front charges and bank account charges are added in.  After paying $5,000 to the creditor, the consumer’s savings amount to only about $800, he said.

“The concept is nuts”

Consumers Union recently advised debtors not to use settlement companies. In 2005, the Center for Responsible Lending said that such services are only appropriate for a very thin slice of consumers — those who cannot pay their bills but can pay something toward their debts each month.  The vast majority of those consumers could work out their own arrangements with lenders, it said.

“Basically you are saving your money instead of paying your bills, and paying someone to do that. The concept is nuts,” said Gail Hillebrand, legislative director for Consumers Union. “Those who can’t pay their bills should be in bankruptcy.”

Settlement companies have no legitimate product, but are thriving because so many consumers are deeply in debt, she said.

“They are selling hope. They are selling optimism,” Hillebrand said. “Scams always come back in a recession, and now they are just roaring back.”

The debt settlement industry has attracted the attention of regulators and legislators around the country. In addition to Cuomo’s investigation, numerous other state attorneys general have taken action against individual firms. And several states have pending legislation that would limit fee structures or force licensing on agents.

Industry defends practice, blames “bad players”

Andrew Housser, who runs the Freedom Financial Network debt settlement company and sits on the board of The Association of Settlement Companies, said that settlement firms offer an important service to customers in certain circumstances. But he said an influx of new settlement firms — many of them run by former mortgage industry workers — are giving the industry a bad name.

“Hundreds of companies are flooding into this and frankly some of them don’t know what they are doing,” he said. “There’s been explosive growth and unfortunately you get some good players and some bad players.”

TASC is actively supporting regulation in 24 states, he said, in an attempt to reign in abusive companies. It’s also self-policing its 200 members and investigating complaints against other settlement firms lodged via the association’s Web site, TASCsite.org, he said.

“It’s frustrating when we hear ads that say ‘guaranteed 30 percent (debt reduction) in 12 months,” he said. Still, he argued that complaints against settlement firms represent an “extraordinary small minority” of customers.

Housser defended the industry’s business model, and disputed claims by consumers and consumer organizations that legitimate settlement firms tell customers to stop paying their bills. By the time consumers arrive at settlement companies, they’ve already stopped paying bills and often can’t afford even minimum payments, he said.

Sending small sums to credit card firms or other creditors won’t do any good, he said. “It will just be a never-ending game,” he said. Those debtors are better off receiving help negotiating settlements with creditors, he said.

He also said that credit counseling isn’t a viable alternative for many indebted consumers.

For example, consumers who enroll in credit counseling generally still face highly monthly payments, because counselors can only negotiate lower interest rates and friendlier loan terms – not principal reductions.  Many debtors can’t afford those payments.

“Some (consumers) fit in sweet spot of debt settlement, where they can’t afford credit counseling programs but still have some income,” he said. “We give them a program to work out their debt for less than face value.” Typical monthly payments for debt settlement are 1 to 1.5 percent of total debt, vs. 2 to 3 percent for debt counseling, he said.

Total settlement fees typically average about 15 percent of debt, he said — meaning a consumer with $10,000 in debt would pay $1,500 to a debt settlement company for help. Housser justified the fees, saying that debt negotiation is a very “labor intensive” business. Legitimate companies clearly list their fees up front, and don’t pile on extraneous charges, he said.

Ray, however, said his experience with debt settlement left him with great cynicism for the industry.

“Debt settlement as an idea is good, but the companies are so greedy they charge high fees, most of which are upfront,” He said.  “I got into debt settlement because I thought it was saving people from the evil credit card companies, but it turns out the debt settlement companies are profiting mostly from the people that never complete the program.  I walked away after just six months. I had too many questions, and the companies that do debt settlement prefer salespeople who are ignorant and just sell without asking.”

Altimirano said her experience with debt settlement left her even more desperate than when she started.

“I don’t think I have any future until I get rid of this debt,” she said.  “I cannot sleep. I cannot get peace. I’m always in a bad mood. It’s horrible. I don’t how I still smile.”

RED TAPE WRESTLING TIPS

Consumers with debt troubles have several options, though none of them are easy.

Debt consolidation: Using a single loan – such as a home equity loan — to pay off multiple debts at full price. The benefit is usually lower interest rates, though debt consolidation loans are now much harder to get. This option is generally credit score neutral.

Credit Counseling: Involves paying a small fee – usually under $100 – to a service that offers budgeting advice and will negotiate lower fees and interest rates with debtors. Debtors pay the counseling service, which in turn pays the lenders. These nonprofits sometimes receive financial support from credit card companies. Still, Consumers Union says credit counseling is often the best choice for consumers who are struggling with high interest rates but capable of paying back their debt.  Debt counseling will impact a consumer’s credit scores, but not as severely as other options. To find a debt counselor, visit the National Foundation for Credit Counseling.

Debt settlement: Specialized firms that instruct consumers to stop paying bills with the hope of negotiating discounts at a later date. This has a dramatic negative impact on your credit score.

Bankruptcy: A federal judge will consider your debts and assets, and decide which debts get paid and which get erased. While bankruptcy is the only option for some consumers, it has the longest negative impact on credit scores.

In general, those in debt should never sign up for a service that requires a large up-front fee.

TIPS FOR DEALING WITH DEBT SETTLEMENT COMPANIES

Some advice from N.Y. Attorney General Andrew Cuomo’s office:

• Be wary of debt settlement companies that falsely promise to obtain substantial lump sum debt reduction settlements. Many advertise “reduce debt now,” and claim to be able to erase as much as 75 percent of credit card debt, but they rarely obtain advertised reductions.
• Never sign a contract with a debt settlement company that requires payment prior to obtaining the promised debt reduction.
• Enrollment in debt settlement plans may not stop creditors from bringing collection lawsuits or prevent enrolled accounts from growing larger through the addition of late fees, interest and penalties. Also, credit reports will be adversely affected.
• Creditors are under no legal obligation to accept a settlement offer for less than the outstanding balance.
• Only a small number of consumers who enroll in debt settlement plans have the financial means to complete them. Usually, they drop out after having paid service fees to the companies without reaching settlements.
• Enrollment in a debt settlement plan premised on stopping payments to creditors will likely lead to more frequent and aggressive creditor collection efforts, often resulting in judgments, wage garnishments and freezing of bank accounts.
• Check with the Better Business Bureau to obtain a Reliability Report on a particular debt settlement company and its rating.
• A wise first step to help resolve an outstanding account is to speak directly to the credit card issuer. Alternatively, it may be helpful to speak to an attorney or an accredited credit counselor who can help develop a plan of action that best works for each consumer’s unique situation.