Help with Debt Settlement
I have $40,000 enrolled in a debt settlement program. I am getting calls from an attorney's office. Did I make a mistake?
I have about $40,000.00 in credit card debt. My husband has about $16,000.00 last August "I" entered into an agreement with a program called Yellow Brick in regards to Debt settlement. who told me that they could settle my debt in about 42 mos give or take for about 30-50%. as it is w/in the first 12 mos of the program obviously nothing has happened yet. I am getting calls from an attorney's office/ collection agency in GA in regards to the largest one which is about $18,000 and have never missed a payment although my name is primary on the loan and we are both working 2 jobs each to pay towards these (hopefully) settlements. I understand my credit will be trashed after this process... I am terrified of losing my home which has been refinanced about 20 mos ago to combine the original mortgage and a home equity loan. at this point I am climbing the walls and wondering if I should just pull out of the program and do it myself or keep going and hope and pray that it works out. Prior to entering into this agreement I spoke with several CCCS services who wanted about $900+ a month and also an attorney who gave a figure of $1300.00/mo with a Chapter 13 as we did not qualify for a Chapter 7. Any suggestions on what to expect would be appreciated. I thought I did all my due diligence but now I am not so sure.
A lowered credit score and nerve-wracking telephone calls from collection agents are common for debtors at this stage of a debt settlement program. My answer below explains why this is so.
I will not comment on the company (Yellow Brick Debt Settlement is not familiar) you mentioned because I have no experience with it. For the benefit of other readers, see the Bills.com resource Reputable Debt Settlement for a checklist of items to look for when choosing a debt settlement company.
Debt settlement at a glance
Debt settlement, also called debt negotiation, is a process by which creditors agree to forgive a part of a balance, saving the debtor up to 60% of the original balance. The debtor pays the new agreed-upon sum. A debtor can negotiate directly with creditors or hire a debt settlement service to negotiate for you. In most cases, professionals will have better results negotiating a settlement than consumers. The pros know how much each creditor is willing to settle and what terms they will agree to. They also know which creditors will not settle debts.
A reduction in total debt is the biggest benefit of debt settlement. If debt is so large that you cannot pay it off and are facing bankruptcy, this is a less harsh option. Although your credit will be dinged, it will not be as severe as it would be with a bankruptcy.
Credit card debt settlement is probably the most common debt settled. However, any unsecured debt can be settled, including medical bills, payday loans, deficiency balances, department store accounts, gas cards, and other personal loans. Mortgages, car loans, and other secured loans cannot be settled because they are backed by collateral that the creditor can claim. Federal student loans also cannot be settled.
How debt settlement works
In a debt settlement program, the debtor stops paying creditors in the plan. Instead, the debtor makes a monthly deposit into a special-purpose account. As this account grows, either the debt settlement professional or the debtor approaches each creditor to begin negotiating a settlement on the debt. Negotiations begin about 180 days after the date of first delinquency when the creditors move the accounts from current to non-current status. A debtor's credit score will suffer during the time when the accounts are unpaid, but will rebound after settled.
A creditor may try to collect the non-current account itself, ask a collection agent to attempt to collect on the debt, or sell the account to a collection agent. Some collection agents are law firms.
Third-party collectors are known to be more aggressive in their collection tactics than original creditors, so collection calls can become persistent or even threatening. Thankfully, the Fair Debt Collections Practices Act has rules governing the behavior of collection agents. However, unscrupulous debt collection agents do not follow these rules.
A creditor may decide to file a lawsuit against the debtor. This is not a frequent occurrence, but it is within a creditor's rights and a possibility about which you should be aware. If a creditor sues a debtor, the court will likely issue a judgment in the creditor's favor. Depending on the local state's laws regarding the enforcement of judgments, the creditor may be able to garnish wages, levy bank accounts, place a lien on property, or take other action to enforce a judgment. See the Bills.com resource collections advice to learn more.
It is important to make routine deposits into the special account. A primary reason for people failing in debt settlement programs is their failure to make deposits into their special accounts on a regular basis. If you are settling your accounts yourself, it is important to stay in contact with the creditors after the 180-day point to keep the lines of communication open for negotiation. At some point the creditor will be open to negotiate the debt. It is up to the debtor to seize the moment and make a lump-sum settlement on the account. Average settlement amounts vary from 40 to 60 cents on the dollar.
Be aware that creditor customer service representatives are specially trained to convince debtors to not settle an account. Creditors have every incentive to divert debtors from trying to settle a debt and instead enroll in a "debt management plan" (DMP). A DMP will cut the interest rate on the account but make no concession on the total balance. DMPs are great for creditors, but offer little value for debtors.
If you are working with a debt settlement professional, stay in contact with them and review your online account information (or call a customer service representative) to learn the status of your accounts. If you are threatened with a lawsuit convey this information to the debt settlement professional immediately so that they can focus their attention on negotiating a resolution to this account.
Debt settlement is usually the faster and cheaper means to debt freedom, as compared to credit card counseling or making minimum payments. It offers a relatively low monthly payment and avoids bankruptcy. The trade-off is a lowered credit rating in the short-term, and enduring collection calls.
If you are considering debt settlement, visit the Bill.com debt savings center to get no-cost, no-obligation quotes from pre-screened service providers.
I hope this information helps you Find. Learn & Save.
Dealing with debt
Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q4 2022 was $16.91 trillion. Auto loan debt was $1.55 trillion and credit card was $0.99 trillion.
A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by Urban.org from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.
Collection and delinquency rates vary by state. For example, in Nebraska, 16% have student loan debt. Of those holding student loan debt, 5% are in default. Auto/retail loan delinquency rate is 2%.
To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.
A. A cease and desist letter will be sent to your creditors. If you are current all kind of red flags go up.
B. If you are current on your payments, the creditors will not accept settlement. Why would they? In their eyes your a good customer.
C. It will destroy your credit. Not just a little ding... Unless you consider bad credit to be good. You will have something between bad and terrible credit.
D. You WILL pay taxes on any amount you are "forgiven". The IRS sees you received money and are not paying it back. That is "income". You will pay taxes on that.
E. So now that you owe a big tax bill what do you do? Your credit is shot. You can't offer a MasterCard to pay the taxes. So you WILL pay HUGE interest and penalties to the IRS. Don't forget the state and local taxes as well.
F. Did you have to pay some company to get your credit destroyed and incur a new tax bill?
G. Did you know you could get a settlement without paying anyone? Why pay someone to destroy your credit? You can do that for yourself.
H. Can you get out of the settlement program... Maybe...If your accounts have been charged off, you are done. There is not really any saving an R9 charge off. IF your debts are not charged off, whether your are current or late they can be help.
I. Creditor calls do not stop with settlements. They don't.
Your question "Did I make a mistake?" is a good question, but may not be the right question. A better question maybe How can I fix this mess? I was in a bad way a few years back… I looked a lots of options, settlement was not as commonly promoted at the time. I went with an A+ BBB rated debt management program. Why? A. I could maintain a credit card out of the program for business, travel etc. B. My credit would still be good. C. My interest rates dropped from the high 20-30% to 6% My bills are getting paid and I feel good about it.
A. In my observations, a cease and desist letter is never sent to a creditor when a consumer enters a debt settlement program. A cease communication by telephone letter is sent to a creditor if the consumer wishes collection telephone calls to stop. Cease and desist and cease communications are different and evoke different responses by creditors.
B. As mentioned, settlement negotiations begin 180 days after the date of first delinquency.
C. Destroy is a relative term. In my observation, if the consumer entering a debt settlement program has an 800 score, their score will drop a great deal more than a person who is already struggling with debt, which is most often the case for consumers considering debt settlement or CCCS. For most consumers entering a debt settlement program, the effect on their credit score is small. As mentioned above, a damaged credit score can be repaired using common sense.
D. The tax information you state represents a shallow interpretation of the law for most consumers enrolled in a debt settlement program. See the Bills.com resource Cancellation of Debt Income (CODI) to learn how consumers can cancel debt income.
E. Untrue for most consumers. See the discussion in D above.
F. Argumentative and untrue for most consumers. Again, see the discussion in D above.
G. An organized consumer can create their own debt settlement program. My answer is a blueprint for creating a debt settlement plan. An organized consumer can also create their own debt management plan (DMP). CCCS companies are not doing anything a consumer cannot do on their own by contacting their credit card issuer. Most major card issuers offer a DMP where the interest fees are waived or significantly reduced in exchange for closing the account and making regular payments.
H. Your answer to your question is non-responsive and raises unrelated issues. Consumers can withdraw from a debt settlement program. Some service providers offer refunds of fees paid if the consumer withdraws from the program. I cannot speak for the service provider mentioned.
I. Once an account is settled, the creditor is contractually bound to cease all collections efforts. By definition, settled debt is settled. It no longer exists. Further attempts to collect any funds on settled debt are illegal.
The consumer asking this question stated that he or she a) could not afford a bankruptcy (it would cost $1,300 per month for a Chapter 13 plan) and b) could not afford CCCS ($900 per month for a DMP). A debt settlement program offered monthly payments the consumer asking the question could afford.A DMP is a good option for consumers who a) can afford the payments, and b) believe maintaining a high credit score is a significant issue. The reader above cannot afford a DMP, so he or she will need to accept the trade-off of a lowered credit score. Your situation and the reader's financial situation are different. There is no one-size-fits-all answer to resolving unsecured debt.