Step 2 - Develop a Cash Flow Engine

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Module 8: Debt Resolution Tool

The Debt Resolution (Settlement) Tool

The next tool to accelerate your way out of consumer debt in order to develop this positive cash flow is called the Debt Resolution Plan, or a Settlement Plan. Now this particular industry is relatively new. There are a lot of bad players in this industry, and it’s not particularly well regulated at this time. So, this is one where you really have to be careful. Fortunately, by looking at New Success Path, we’ve done the research for you and made it very easy to select a reputable organization to work with.

Television is full of these ads, and the radio is full of these ads. There are lots of ads about how to settle your account for less than you owe. Most of these companies, in order to recoup their advertising expenses pretty much charge high fees of $1000 and $1,500 front-end fees. Basically they take their money out of your first payments. So, until they are paid themselves your don’t start accumulating any money at all to pay off your debts. One of the other bad things about the bulk of fees upfront is they really have no incentive to settle any of your debts, because they’ve already been paid up front. So, we only work with organizations that are paid when they settle your debt. They only get paid a percentage of the money that they save you. They do not get paid a percentage of the total debt. This provides an incentive for them to save you the most money on each negotiation.

Also, we only work with an organization that would use an escrow agent and an escrow account in order to safeguard your funds. By placing your funds with an independent third-party it protect those funds and allows you to have an element of control over those funds. So, that’s an important differentiator to look for out of all these organizations.

Typically, just like credit counseling, the monthly payment is a single monthly payment. They pretty much need a payment of 1 ½% of your debt. The percentage doesn’t go down as the debt gets settled off. It’s 1 ½% of the initial debt that you start the program with.

If you can hold 1½%, that would be less than the payment required for a credit counseling payment. Under credit counseling the creditors actually tell you exactly what percentage of the debt you have to pay. You really don’t have a negotiating situation. You have to make that monthly payment. If for any reason you have to skip a month or short-pay a month, most of the time you’ll get kicked off the program. It’s very, very difficult to allow any interruption in that flow on a credit counseling program.

With a Settlement program it’s a little different, because you basically have your own little savings account. You’re building up your funds in order for the Settlement organization to offer a discounted settlement of that debt. So, if you have a bad month, or if you have to short-pay a month, you won’t get kicked off any program; but you need to make sure that you consistently catch up, or you consistently hang in their with 1 ½% of the debt. Otherwise, it will take you a long period of time to get out of debt.

They also suggest a minimum payment of a $125 dollars. If you’re only paying less than $125 dollars, you’ll never get out of debt, and you’re basically just bumping along. So, that’s the advantage. Settlement is also one monthly payment, but the advantage is that you won’t have any fears or risks that you’ll get kicked off the program if you have a bad month.

The other advantage of the settlement program is that credit counseling traditionally can only work with credit cards. They cannot do medical debt, they cannot do repossessed car loans. They can’t do cable, disconnected cable, and cell phone bills. They can’t work with any of those types of things. A lot of you have medical debt, so they really can’t work with those. Debt Settlement can work with these types of debt. You can put medical debt in there and all those other types of debt in there.

The advantage also of the Debt Settlement program is that you can clear your debt in about three years, versus five years on credit counseling program. These programs work with just about any amount of debt amount. With as little as two or $3000 of debt you can still use a debt settlement program. Typically if you only have that much debt you should be able to clear your debt without having to use that tool. Each person’s case will be different.

Now, we have recommended American Payment Technologies as the escrow agent. They have a good long track record of dealing with large amounts of money safely. We also have a group of recommended settlement organizations. Depending on your state of residence, once you go on the escrow agent website, they will make a recommendation for an approved settlement agency for that state. Since most of it involves a power of attorney and lawyers, different lawyers, as you can understand, are only licensed to practice in different states.

As to the negatives of debt settlement, it’s not all good news. There are also risks. One the risks of debt settlement is that you could possibly have a judgment taken against you. If you’re not paying these bills, and they’re going longer and longer without getting paid, there’s the chance that there could be some creditor who would decide to take a judgment out against you. If they succeed in getting a judgment against you, they could garnish your wages in certain states, or seize your bank accounts. Those, of course would be things we would like to avoid. In about 10 or 15% of the cases, depending on the balances, depending on the creditors, and depending on the states, this could happen to you. You would definitely need to talk to the escrow agent and the settlement organization to make sure that the your situation would be a very low risk for this to happen. There are strategies available to successfully settle your debts even if this happens to you.

Now your fallback option in the event of a judgement and/or garnishment threat, would be to move directly to the bankruptcy tool. That’s the one we’ll talk about next. The advantage of the settlement program is that all of the funds in escrow are available to directly be paid to the bankruptcy attorney to help you with the bankruptcy process. So, that’s the situation.

Bankruptcy Tool

As discussed above, there are certain states that can garnish wages, and there are other states where you can’t have your wages garnished. There are also types of income like your social security payment or social security disability type payments, that are exempt from garnishment as well. So, you’ll need to talk to the settlement organization and to the escrow agent. These organizations are not allowed to give you legal advice. They can give you public information based on what states have garnishment laws and which states don’t. They can get you to the right sites to get you the right information. However, they can NOT provide specific advice for your specific situation.

There is other important information you need to explore prior to considering Bankruptcy. In most cases Student Loans and Tax Delinquencies are NOT able to be forgiven in bankruptcy. Prior to delaring Bankruptcy you are REQUIRED BY LAW to obtain a pre-bankruptcy credit counseling certificate from an organization approved by the Executive Office of the United States Trustee (EOUST). At we strongly suggest you seek this counseling with Approved Bankruptcy Counseling Services at (800) 531-5124. They are listed with the EOUST under the name Community Credit Counseling Services but do business under the more descriptive name above.