The Myth and the Truth of Debt Management Work

Have you’ve seen TV commercials or read ads from debt management companies such as Consumer Credit Counseling Service or Consumer that promise to save you thousands of dollars?

That’s the myth they want you to believe.

The truth is that yes; they can get your debts reduced but only by getting your credit trashed.

They’ve sprung up like dandelions in the spring

Debt management companies have sprung up mostly as a result of the Great Recession of 2007. Their promise is that they will help “manage” your debts by requiring you to make one payment a month to them, which they then divvy up among your creditors. In addition, they are often able to negotiate lower interest rates and lower payments to your creditors.

A form of debt consolidation

If you contract with a debt management company to take over your debts, it’s not a loan as would be the case if you were to borrow the money to pay off your debts. However, it is a form of debt consolidation. People sometimes get the two of these confused.

The biggest difference is that with a debt consolidation loan you’re required only to pay interest on the money you borrow. In comparison, debt management firms charge fees that can be as high as 25% of the amount of debt being managed.

It comes at a price

It is true that a good debt management company should be able to get your interest rates and maybe even your monthly payments reduced but it comes at a price. If you use a debt management company and then apply for a conventional, VA or FHA loan, you will be treated about the same as if you had a chapter 13 bankruptcy.

And if you apply for a traditional mortgage the guidelines for underwriting the loan will consider that your credit is trashed.

The truth – hard work is in

The truth of debt management is that what’s required is that you must change your behavior. This is only where you can get real debt help. Changing your financial behavior will change your life for good! The fact is that true debt management is just about one thing – and that’s you controlling your money.

No magic formula

There’s no mystical, magical formula for good debt management. The solution is a combination of common sense and having a plan for your money. Good debt management is hard work because it’s 80% your behavior and just 20% your knowledge. While some debt management companies might want you to think of it as rocket science, it’s not.

But it’s not easy. The truth is that it’s really pretty hard a lot of the time.

However, it’s worth it. If you create a plan and are determined to get your debts under control you’ll save money because you won’t be paying any debt management company a fee, your credit reports will stay clean and you’ll have more flexibility.

A real debt management plan

There are just five steps to a real debt management plan.

The first is to make a budget because without a budget there is no way you can know how much money you have to put against your debts. There are a number of free apps available for creating a budget and there are free budget worksheets available online you could download.

Step two is organizing your debts. This means making a list of all of your debts, with the names of your lenders, your balances, your payment due dates, their interest rates and minimum payments required. Again, you could just enter this information into a worksheet.

Calling your creditors is step three. When you call, ask for its hardship department. Explain to your contact exactly why you’re having a serious financial problem. This could be due to a job loss, a nasty divorce, a huge medical bill or because you were forced to take a serious cut in pay. In most cases, you’ll find that lenders will be willing to reduce your interest rates rather than having to deal with a default.

Your next step is to make a repayment plan. The two most popular debt repayment plans are called the snowball method and the avalanche method. Choosing the snowball method means ordering your debts from the one with the lowest balance down to the one with the highest and then concentrating your efforts on paying off that first debt. The avalanche method is where you order your debts from the one with the highest interest rate down to the one with the lowest and then focusing all your efforts on paying off that first debt. Regardless of which you choose you will need to continue making the minimum payments on your other debts.

Step five may be the hardest because it’s to begin using credit wisely. This may be the most difficult part because it’s the changing your behavior thing. If you have credit cards that are still open, you might use one of them to make several small purchases and then run home and immediately pay off your balance. You should also set up automatic payments for a small recurring bill to make sure it’s paid in full every month.

But the most important thing of all is to stay well away from any spending that would tempt you to get into more debt. You need to learn to use credit sensibly and not as “retail therapy”.

7 Reasons Why You Need to Start Budget Tracking Immediately

You’ve probably been told at least a zillion times that you need a budget and there are good reasons for this. Without a budget, it’s just flat impossible to know where your money is going and how much you have left over for debt settlement. We admit that budget tracking is not easy. It means noting everything you spend money on right down to that candy bar you bought out of your company’s vending machine – and you must do it almost immediately before you forget about it. If you’ve ever tried tracking your spending, you probably remember those days when you got home with $14 less in your wallet than you thought you had but had no idea as to where the money had gone. That’s because you weren’t budget tracking. If you’re not doing this, here are seven reasons to begin doing it immediately.

Budget tracking builds organization and discipline

If you are budgeting this can definitely help you remain disciplined to organize your finances, which is step number one in learning your overall financial health. The fact is that if you don’t have data that’s easy to read in the form of budget tracking there’s just no way you can know what’s going on in your financial life, let alone do anything about changing it.

It makes you think about your money

An important side benefit of having a budget and tracking your spending is that the more time you spend thinking about your money the more you’ll be focused on building your wealth. And when you start thinking about your money more often that’s when you’ll start finding ways to save more money or to increase your income.

It helps you prevent a crisis

If you’re tracking your spending and reviewing your finances regularly this will help you spot trends and discover areas that can be improved long before they become problems. When you prevent a crisis from starting, you’ll be way ahead of everyone else who will only be able to react.

Budgeting is a quantifiable way to measure your progress

We guess in theory that everyone would like to cut their spending but it’s impossible to do this unless you track your progress. Budget tracking can certainly be used to measure your progress but it’s not just a benefit, it’s really a requirement.

Budget tracking can be a great tool for starting family discussions

It’s always tough talking about money. But if you have a wife or husband that’s involved in making a budget and tracking expenses it’s always a good idea to lay out the facts when talking about money. Using an expense tracker is a really good tool to help with this. And if you have children that would be affected by your decisions you might want to involve them in some of your expense tracking.

It is power

You may have heard the old saying that “knowledge is power”. It’s definitely true when it comes to keeping track of your budget. If you do this. you’ll know precisely how much money you need on a monthly basis. When you know this, you will be able to plan and create an emergency fund that will have a sufficient amount of cash. Plus, you will be able to calculate how you will treat unexpected issues such as losing your job or having a child and how that will affect your finances.

It will relieve you of much stress

A tremendous amount of stress will be lifted off of your shoulders when you know your exact financial situation. You’ll no longer have to worry about those unknown expenses of life. Even in a worst-case scenario, if you find your finances are on the shaky side, you’ll be spending your time fixing them and instead of hours worrying about them to the point where it makes you crazy.

Budget tracking is not all that difficult

The best part of this is that budgeting and budget tracking is not half so difficult as it used to be. This is thanks to all the budgeting apps now available either free or very low cost. Some of the most popular of these include Mint, You Need A Budget, Every Dollar, Easy Envelope Tracker, Billguard and Dollar Bird. Probably the most popular of these is Mint as it will not only track your spending but automatically divide it into budget categories. Once you set spending limits in each of your categories, Mint will actually notify you via email if you overspend in any of them. The important thing is to review the top-rated apps in this category, evaluate them carefully and then choose the one that you think will best fit your needs. And, oh, if you forget a candy bar or latte somewhere along the way, don’t panic. This won’t change your life and will have very little of an effect on your finances.

“69% of Americans Have Less Than $1000 in Savings”

Do you find this statistic hard to believe? Does it make you want to run off to to check if its valid or just truthy? We can save you the trip. This comes from an article in Money magazine, which also reported that this is a big increase since last year. What’s even scarier is that this 69% of Americans don’t have enough money saved to cover a $1200 emergency.

So how do you stand? If you’re considering debt settlement, do you have more than $1000 in savings or are you part of that 69%? If you fall into that latter category you need to get to work and build up your savings. This is because debt settlement can save you money – and probably a lot of money – but it has one drawback. You must have the money saved to cover the lump sum payments you’ll be required to make to settle your debts.

How much do you need to have saved?

This will depend, of course on how much money you owe. For example, if you owed $30,000 to four different lenders you might be able to settle these debts for around $15,000. But that begs the question, how would you ever get that $15,000?

How do you get there?

There’s the old riddle which begins with the question, how do you eat an elephant? The answer, of course, is one bite at a time. And that’s how you get the $15,000 or whatever to settle your debts – one deposit at a time.

Here’s the math.

If you could save 10% of your net income a month or $500 with a 1% return you’d have $5005 saved at the end of year one, which should be enough to settle one or more of your debts. Keep saving at this rate and you should be able to save enough in two or 2 1/2 years to cover all of your settlements.

If 10% is too much

You might be sitting there thinking, wow! If only I could save 10% of my net income given my current financial situation. If this is the case, you may have to start smaller. If you can start by saving just $50 a month you will eventually reach your goal – it will just take you longer. But the important thing is to start saving money until it becomes an ingrained habit. In fact, you might want to have the money automatically withdrawn from your checking account and deposited into your savings account so that you’d be saving every month without even having to think about it.

If you don’t have a budget

It’s just flat impossible to save money for debt settlement unless you have a budget. The reason for this is simple. If you’re not budgeting your money you could easily end up spending every cent you earn or even more. Does the B word as in budget cause cold shivers to run up and down your spine? Budgeting has become almost drop-dead simple thanks to the many apps available. Some of the most popular of these are You Need A Budget,, Wally and Billguard. will track your spending, divide it into categories and send you alerts at least once a week so you can easily see exactly where you stand. Once you’ve created your budget categories Mint will even email you an alert if you overspend in any of them. Plus, it gives you a nice graph of your spending so that you can see exactly where your money has gone.

The 20/50/30 budget

There is also a minimalist way to budget called the 20/50/30 budget. It’s so simple you could probably write it on the back of an envelope. The 20 is the 20% you save (at least theoretically), the 50% is to cover all of your necessities and the 30% is your disposable income or the money you can spend howsoever you choose. Of course, you will need to track your spending for at least 30 days before you can divvy it up into the 20%, 50% and 30%. You can also probably track your spending on the back of an envelope but make sure you write down everything right down to that $.75 bag of pretzels you bought from a vending machine.

No matter which you choose

No budget is any better than the person that created it. This is a short form way of saying that regardless of which budgeting option you chose the critical thing is to stick with it. This will take more than a small amount of self-discipline at first but if you can stick with your budget for five or six months it will become such an ingrained habit you’ll hardly even think about it. And remember the words of Nelson Mandela, “It always seems impossible until it’s done”.

How to Improve Your Credit Score After Debt Settlement

The harsh fact of debt settlement is that it does have its consequences. First and foremost, it will cause your credit score to take a hit – maybe by as many as 80 points. This could be enough to drop you from having good credit to just fair credit.

Check your credit score and credit reports

Once your debts are settled you’ll need to check your credit score to see where you stand. You should also order your credit reports from the three credit bureaus – Experian, TransUnion and Equifax. There are two reasons to do this. First, you need to make sure your settlements were reported to the credit bureaus.

Second, it’s important to check your reports for errors that may be dragging down your credit score. A study released in 2012 by the Federal Trade Commission reported that 20% of us have errors on at least one of our credit reports. What you need to look for is whether your personal information is accurate and if all your credit accounts have been reported. Also, look for any late or missed payments that you thought you had made on time and any accounts or credit applications that you simply don’t recognize.

If you find any, it is incredibly important to dispute them with the appropriate credit bureau – by letter – and with any documentation you have to prove your case.

Determine why you have a low credit score

Of course, debt settlement may be the major reason why you have a low credit score but there could be others. For example, your identity could have been stolen and the thief is abusing your credit. There could be a collection account from many years ago that’s still being reported to the credit bureaus despite the fact that it’s passed the statute of limitations in your state. Or maybe you defaulted on one of your loans and it’s now appearing as multiple defaults because that debt has been sold and resold several times to debt collectors. Finally, it’s possible that your credit history was mixed up with that of someone else with a similar name.

It’s also important to know how your credit score is calculated. It has five components. The most significant of these is your credit history (35% of your score) which is basically how well you’ve handled credit in the past. The second most significant component is your credit utilization ratio, which is the amount of credit you have available divided into the amount you’ve used. It accounts for 30% of your score. If you do the math and find you have a credit utilization ratio of 40% or higher you can improve it by either paying down some of your debt or getting more credit. Between these two options the better by far is to pay down some of your debt. If you can do either of these and get your ratio down to 35% or better, it will definitely have a positive effect on your credit score.

Finally, there is the age of your accounts, which accounts for 15% of your score, and your account mix and history of credit applications – each of which accounts for 10% of your score.

A low credit score will cost you a lot of money

A low credit score is expensive. In fact, it can cost you literally thousands of dollars over the course of your lifetime in the form of increased interest rates. A low credit score can cause higher insurance premiums as well as higher utility and security deposits. Plus, there’s the stress of having to deal with upset creditors or even debt collectors, which can actually lead to health problems.

Make a plan to fix things

If you find all of your information is accurate and you know what you did wrong, you need to create an action plan to fix things. There are sites such as where you could create a free account to make an action plan.

Unfortunately, creating an action plan may not be enough to improve your credit score. For example, if you were the victim of identity theft you may have a very hard time proving that you’re not the one that applied for that car loan or, worse yet, defaulted on it.

It may not agree with you

As noted above, if you find errors in your credit reports you will need to dispute them with the three credit reporting bureaus. The three credit bureaus have 30 days to process any dispute you file with them. But just because you’ve filed a dispute doesn’t mean the credit bureau will necessarily agree with you and remove the error. What that happens then you’ll just be stuck with bad credit.

Answering the Question — Debt Settlement or a Debt Consolidation Loan?

Short of moving to Bolivia, India or Sweden there’s not much you can do about your debts except pay them. The other alternative – not paying them – would lead to serious consequences that could haunt you for years. For example, this would mean you’d have a very low credit score, which would make it tough for you to get new credit at anything approaching a decent interest rate. A low credit score could cause your insurance premiums to go up and you might find it very difficult to rent a house or apartment.

The pros and cons of a debt consolidation loan

The biggest pro of a debt consolidation loan is that it should have a much lower interest rate than the average of the credit card interest rates you’re currently paying. Personal loans are now available with interest rates as low as 5.95%. If you could qualify for one of these loans would definitely save you money versus the interest rates you’re now paying. Consolidating multiple credit card debts into a debt consolidation loan would also mean just one payment a month and you could even automate it so that you’d never again have to worry about missing a payment. In addition, debt consolidation loans have fixed terms of either three or five years so that you would absolutely know when you’ll be debt free.

The biggest con of a debt consolidation loan is that if you have lousy credit you may not be able to get one. And if you could get one it would certainly have a much higher interest rate than 5.95%. Plus, you might be required to pay a significant origination fee and most personal loans have pre-payment penalties.

The pros and cons of debt settlement

If you’re not familiar with debt settlement this is where you offer lump sum payments to your lenders to pay off your debts but for less than their balances. As an example of this, you might be able to settle a $5000 debt for $3000 or even $2500. In fact, debt settlement is the only way to pay off debts for less than you owe.

While it is possible to do DIY debt settlement most people choose to hire a debt settlement company. There are several good reasons for this. First, because most people are not skilled negotiators it would be tough for them to negotiate really good settlements. Second, and maybe most important, using a debt settlement company eliminates the need to have the cash available to pay for the settlements. Getting back to our example of settling a $5000 debt for $3000 you’d need to have the $3000 in cash to immediately send the lender because if not, it would not agree to any settlement. If you hire a debt settlement company you’d also have consolidated your credit card debt as you’d be required to transfer a set amount of money each month to an escrow-like account – instead of having to worry about making those lump sum cash payments.

The biggest con of debt settlement is what it would do to your credit score. Debts that have been settled are never reported to the three credit bureaus as “paid in full”. While no one knows for sure how much this will damage your credit score there are experts in this kind of thing that say it would lower it by at least 80 points. Of course, if you’re so far behind on your bills that you’re thinking about debt settlement the odds are pretty good that your credit score has already taken a serious hit.

A second con is what it costs to use a debt settlement company. Most of them charge a flat fee of 15% to 25% based on the size of your debt. So settling $25,000 of your debts could cost you as much as $6250.

The third pro of using a debt settlement company is that it would relieve you of the worries and stress of dealing with your creditors. The settlement company would take all of this off your hands by dealing with your creditors for you.

So which is best?

While this is a question that only you can answer – depending on your financial circumstances – debt settlement is often the better option because of the money it would save you. Let’s go back to that $25,000 of debts where your fee could be the maximum of 25% or $6250. For the sake of the example we’ll suppose that the debt settlement company could settle those debts for $12,500. Subtract the $6250 from this and you’d still be saving $6250. Plus, you would be debt-free in anywhere from 24 to 48 months. In comparison, if you were able to get a debt consolidation loan at, say, 8% with a three-year term you’d have a monthly payment of $783.41 and the cost of the loan will actually be $28,202.73 or more than $3200 just in interest charges.

What’s Scarier? Your Finances or a Haunted House?

Halloween brings out everything from ghouls and witches to fairies and goblins. These monsters can definitely cause a shiver to run up and down your spine. But there are some things in life that are scarier than Frankenstein or Freddy Krueger. And the majority of them are financial. For example, according to a NerdWallet study consumer credit card debt is now $729 billion and climbing. This means the average US household is carrying $15,675 in credit card debt. Another study found that one out of every three of us have $0 saved for the future. And yet another study revealed that 63% of Americans don’t have enough money saved to cover a $500 emergency.

Pretty scary stuff, huh?

But what’s even scarier is if you’re in a very tough financial situation because of your credit card debt.

What to do, what to do?

The one thing you don’t want to do is ignore those debts. If you do this, things will only get worse. What you need to do is make a list of how much you owe on each credit card and – here’s the key factor – the interest rate on each. When you do this you then have two choices. You can either decide to attack the debt with the highest interest rate, which will save you the most money, or you can first tackle the one with the smallest balance. If you choose to attack the one with the smallest balance – called the snowball method – this should help keep you motivated because you will eliminate your credit card debts faster.

Pay as much as you can

Whichever method you choose your next step will be to pay as much as you can on that first debt. When you’ve eliminated it you’ll have extra funds to apply to the next debt in line. It’s also a good idea to call your credit card companies and ask to have your interest rates reduced. Just be candid, tell them you’re having a tough time making payments, can only pay a certain amount each month and could they lower your interest rates. Most credit card issuers will agree to work with you because getting something is better for them than getting nothing. And, of course, while you’re working to pay off those credit card debts put all your credit cards in lockdown mode so you won’t be tempted to use them in the future.

Trying to do debt settlement yourself

Have you thought of getting your credit card debts paid off using debt settlement? This is not only a good option but you could negotiate the settlements yourself. There’s nothing that says you must hire a settlement company. However, trying to settle your debt yourself can turn out to be pretty frightening. You’ll be dealing with people that are hardened veterans, tough negotiators and who are not paid to give away their employers’ money. You will need to be tough yourself and a pretty darn good negotiator to negotiate successful settlements. But the really scary part is that you’ll need to have the cash available to pay for your settlements. There’s probably not a lender in the world that will agree to settle with you if you can’t promise immediate payment. In fact, this can be one of your biggest bargaining chips – “if you settle this debt with me now for half of what I owe, I will send you the money tomorrow via wire transfer or certified letter”.

Being behind in your retirement savings

One thing that can be pretty scary is to wake up at age 40 (or older) and realize you haven’t saved anything for retirement. The good news here is that it’s never too late to begin saving. This is because every dollar you save will grow and compound.

Here’s an example of this. Let’s say you’re 40 years old and you can save $1000 a month. While this may not be easy, you should be able to make some changes in your budget or pick up a side gig, which would get you there. If we assume that you can get a 7% or 8% market return you will have $1 million by the time you reach age 65. Let’s say that again. By the time you reach age 65, you would have $1 million. And while this might not be the $3 million or $4 million you initially wanted to have it’s definitely better than not having anything.

Not if but when the stock market craters

If you have investments in the stock market you probably took some kind of a hit as a result of the Great Recession. Bear markets have happened in the past and will continue to happen so brace yourself. There eventually will be another one. But this doesn’t mean you need to panic. The investors that were hurt as a result of the 2008 crash were those that sold their stocks and never got back in. It wasn’t the ones that stayed the course. So if it happens again, try to keep your emotions separate from your investment decisions. And if you can’t stop obsessing over your investments, think about hiring a financial advisor who could stop you from making emotional decisions you might later regret.

Three Good Alternatives to Debt Settlement and One Seriously Bad One

If you feel as if your situation is hopeless – that there’s just no way you can repay your debts – then debt settlement can be a very good option. It’s become very popular since the Great Recession because it’s the only way to get debts reduced. In fact, a good debt settlement company is often able to get its clients’ debts cut in half. But it does have its drawbacks. For one thing, it will damage your credit score as debts that have been settled are never reported as “paid in full”. Debt settlement companies don’t work for free. They all charge fees of 15% to 25% of the amount of debt being settled. And the money your creditors forgive in debt settlement could affect your taxes.

Would you be a good candidate for debt settlement

Let’s say you owe $7500 in credit card debt and are two months behind on your payments. If this were the case, you would not be a good candidate for debt settlement. Reputable debt settlement companies generally don’t take on people as clients unless they owe more than $8,500 and are at least five months behind on their bills. Fortunately, if you don’t fit this profile there are four alternatives to debt settlement.

Get counseling

Consumer credit counseling agencies were created specifically to help people that are having a problem repaying their debts. The best ones are nonprofits and charge either nothing or very little for their services.

When you go to one of these agencies for help you will be assigned a debt counselor that will first spend 45 minutes to an hour reviewing your finances. He or she may then help you develop a budget designed to get your finances under control and your creditors paid. Or you might be offered what’s called a debt management plan (DMP). This is where the counselor develops a plan for repaying your creditors over a four- or five-year period. She or he will then contact each of your creditors to negotiate reductions in your interest rates and to have any fees waived. Assuming that both you and your creditors accept your DMP you will no longer pay them. You will pay the credit counseling agency a fixed amount of money each month instead and it will then distribute it to your creditors per your DMP.

Consumer credit counseling can be a very good option for people who owe less than $7000 and are just a few months behind on their bills. It’s also good for people who have a tough time managing their finances.

Do a balance transfer

If most of what you owe is to credit card companies, then a balance transfer could be a good option. This is where you transfer the balances on all of your credit cards to a new one with a lower interest rate or, better yet, a 0% interest balance transfer card. For example, let’s say you have four credit cards at interest rates of 15%, 19%,17% and 21% or an average of 18%. If you transfer the balances on these cards to a new one with an interest rate of 12%, you’d end up with a much lower monthly payment, which should make it easier for you to repay the debt. There are now 0% balance transfer cards that offer an introductory period as long as 18 or even 21 months’ interest free. If you could qualify for one of these cards, you would then have a lot of time to pay off your balance before your introductory period expires. And it’s really important to get that new balance paid off before this happens because when it does your interest rate could skyrocket to 21% or even worse.

Take out a debt consolidation loan

A third alternative to debt settlement is a debt consolidation loan. If you have a decent credit score of (661 or above) you should be able to get a personal loan and use the money to pay off your debts. Interest rates are now near an all-time low so you might be able to get a personal loan with an interest rate as low as 8%, which should be a lot better than the average of the interest rates you’re currently paying. If your credit isn’t so hot but you own a home and have equity in it, you should be able to get either a home equity loan or home owner equity line of credit. Both of these could have interest rates of less than 6% and would give you much more time to repay them, which would mean lower monthly payments.

The very bad alternative

The fourth alternative to debt settlement is a very bad one – to file for bankruptcy. Bankruptcy is a good way to get unsecured debts such as personal loans, old cell phone bills, card credit debts and payday loans discharged, which is a fancy way of saying they would be eliminated.

Unfortunately, bankruptcy is not a total “get out of jail free” card. It won’t eliminate secured debt such as an automobile loan or mortgage nor will it eliminate some unsecured debts including alimony, child support, spousal support, back taxes, debts incurred after you filed for bankruptcy and any student loan debts.

In addition, a bankruptcy will stay in your credit reports for 10 years and will have a very negative effect on your credit. For example, you’ll have a serious time getting new credit for two to three years after a bankruptcy, your insurance premiums will likely go up and you may find it hard to rent a house or apartment. Many employers now routinely check credit reports so bankruptcy could literally keep you from getting a good job.

How to Protect Yourself from Debt Collectors While Working on Debt Settlement

If you’re in the process of trying to settle your debts, it’s more than likely that you’re getting harassed by debt collectors. They will say and do almost anything necessary to collect from you. It’s well documented that many debt collectors use abusive practices. And while they may try to convince you otherwise, you do have rights when it comes to debt collectors you are actually protected by federal laws better known as FDCPA or the Fair Debt Collection Practice Act.

What collectors can’t do

Thanks to the FDCPA there are regulations, rules and laws that collection agencies, debt purchasers and collection attorneys are supposed to adhere to. Of course, many of them will try to skirt the law and use illegal tactics to collect from you. However, this only works if you don’t know your rights. The key to dealing with debt collectors is to become educated in the FDCPA, which among other things prohibits debt collectors from:

  • Harassing you
  • Swearing at you or being demeaning in any way
  • Calling before 8 AM or after 9 PM
  • Calling you at work if they are told your employer prohibits such calls
  • Mentioning garnishments, lawsuits, levies, etc. without your prior consent

An abbreviated explanation

This, of course, is only an abbreviated version of the FDCPA. There are numerous other rules that collectors must abide by. Beyond this, there are probably statutes in your state that govern the behavior of debt collectors. So if you are dealing with one or more you should definitely call your state’s attorney general’s office to see what laws and guidelines apply that could be helpful.

Avoid these mistakes

The biggest mistake you can make is to talk to a debt collector without knowing your rights. Even the most ethical of debt collectors will use clever tactics to get you to pay as this is their job. In fact, most debt collectors are paid on a commission basis. So the more they collect from you, the more they earn. This, of course, is why they will say just about anything to convince you to pay your debt – even if you don’t have the money. But if they tell you that your only option is to “pay your balance in full” don’t believe it. This is rarely true and you do have options.

You may restart the clock

If you do decide to make a payment on your debt, it’s important to understand that this may restart the clock on it. For instance, let’s suppose you have a debt that’s four years old, which means it should be nearing the statute of limitations. If you make a part payment on the debt this could reset its clock to now, which would eliminate all possibility for it to pass the statute of limitations.

Stopping harassment

If you have a debt collector harassing you – despite the fact that this is illegal – you need to send a letter to his or her agency. This is called a cease-and-desist letter. You can find an example of it on sites such as Be sure to send your letter as certified mail so that you can track the fact it was received. And naturally you will want to keep a copy for your records. Once the debt collection agency receives your letter the law says it can only contact you one more time, in writing, and that’s to let you know what action it will be taking if any.

Request verification

If you feel the debt isn’t yours, you can ask the collection agency to validate it. This will require a debt validation letter. You will need to ask how the amount your owe was calculated, the identity of the original creditor and proof that the statute of limitations has not expired on this debt. You can also require the collection agency to provide you with copies of documentation showing you agreed to pay the amount you say is owed and that has my signature.


Even if you know the debt is yours, this doesn’t necessarily mean you have to pay the full amount. Debt collectors typically buy debts for literally pennies on the dollar. This means there is room for negotiation. For example, you might be able to negotiate an $1800 medical bill down to $900 or less. Of course, you will need to have the $900 or whatever ready to send to the debt collection agency.

If all else fails

If all else fails, you could choose to wait it out until the statute of limitations kicks in and the debt falls off your credit report. This should not have a significant impact on you unless you’re about to buy a house or trying to get a new job. In this case, it could be a problem. But otherwise, your best bet might be to send the collection agency that cease and desist order and then, unless it actually sues you, just wait for the debt to fall off your credit report.

Why Debt Settlement Begins with Analyzing Your Debts

Debt settlement can be a good option for people struggling to repay their debts. In fact, it can be the best option because it’s the only way to get debts dramatically reduced. Other options for managing debt such as a debt consolidation loan, avalanche transfer or consumer credit counseling can’t reduce your debt. What these options have in common is that they just move your debt from one set of lenders to a new place or a new lender.

Do you have a budget?

If you haven’t yet budgeted your essentials, you need to do this first. For most people the essentials are food, shelter, transportation and insurance. Together, these should account for no more than 50% of your net or take home pay.

Next, analyze your debts

The next step in getting ready for debt settlement is to make a list to analyze your debt. If you have Excel, you could use it to list your debts. If not, there is the free Google Sheets. Or you could just use a pencil and a piece of paper. Your list should have four columns: Name of Creditor, Debt Amount Owed, Interest Rate and Minimum Monthly Payment. Make sure you list every debt up to and including payday loans, medical debts, unpaid cell phone bills, gas cards, department store cards, finance companies – everything.

You may be shocked

Once you’ve listed your debts you need to total up that first column and the result may shock you. Even though you already know you’re in trouble with debt you may not actually know how much trouble you ‘re in.

Order your credit reports

If you have not seen your credit reports recently you need to get them. The three credit reporting bureaus – Experian, TransUnion and Equifax – are required by law to give you your reports free once a year. The website can give you all three of them simultaneously.

You need to review your credit reports carefully as they could contain errors. The Federal Trade Commission released a study two years ago that nearly 20% of us have errors in our credit reports that could be damaging our credit scores. If you do find errors, you need to dispute them. Getting them removed from your credit reports should help your credit score at least somewhat.

How to repay debts

Could you repay debts rather than choosing debt settlement? This would be a better alternative because of the negative effect debt settlement would have on your credit reports and your credit score.

The two most popular ways to pay off debt are the avalanche method and the snowball method. The avalanche method means ordering your debts from the one with the highest interest rate down to the one with the lowest and then focusing all of your efforts on paying off that first debt.

The snowball method is where you order your debts from the one with the lowest balance down to the one with the highest and then do everything you can to pay off that first debt. Of course, regardless of which of these you choose you will absolutely need to continue making the minimum payments on your other debts.

If you choose debt settlement

If you think debt settlement would be your best option, it’s important to understand that not every debt can be settled. For example, mortgages can’t be settled nor can auto loans. These are called secured debts because you were required to use an asset as collateral. There are also some unsecured debts that can’t be settled. This category includes spousal support, alimony, family support, back taxes and student loan debts. Cross these debts off your list and you’ll now know much of your debt could be settled.

To DIY or not to DIY?

Your final step will be determining whether to settle your debts yourself (DIY) or to use a debt settlement company. There are pros and cons to both these options. The biggest pro to DIY debt settlement is that it wouldn’t cost you anything. Its biggest con is that you would need to have cash available for the lump sum payments required in debt settlement.

The biggest pro of using a debt settlement company is that instead of needing to have cash to pay for your settlements you’d have one fixed monthly payment for a fixed period of time. It’s number one downside is the damage it will do to your credit score. Of course, if you’re already behind on your bills, which is probably the case, your credit score may have already taken a hit so that debt settlement would not make a big difference.

How much do debt settlement companies charge?

It’s pretty easy to spot a dishonest debt settlement company as it will insist you pay its fee upfront. Reputable debt settlement companies don’t collect their fees until they have settled all your debts. They charge from 15% to 25% depending on the amount of your debt. However, even after paying the debt settlement company’s fee you should still save from 30% to 37% of what you initially owed.

Debt Settlement Work and Fixing Bad Credit

Do you have bad credit? While it’s possible to live with bad credit it definitely makes life more difficult and more expensive. As an example of this, did you know that insurance companies usually charge higher premiums for drivers that have bad credit scores? Did you also know that if you’re getting utilities turned on the company will check your credit in order to see if you will need to pay a security deposit? And, of course, everyone knows that if you want to get a personal loan or credit card the bank will check your credit score.

Why fix bad credit?

Credit repair isn’t just important for saving money on loans, credit cards and insurance. There are other reasons why it’s critical. A better credit score can mean new opportunities for employment. And do you dream of starting your own business? Then you need to start credit repair sooner than later.

Get your credit reports

You can’t know about your bad credit until you get your credit reports from the three credit reporting bureaus – Experian, TransUnion and Equifax. They are required by law to provide you with your credit reports free once a year. Or you can get all three free simultaneously on the website

Look for errors

Review your credit reports carefully looking for errors that could be damaging your credit score. The credit bureaus process literally thousands of pieces of information a day and mistakes can be made. In fact, the Federal Trade Commission released a report several years ago that nearly 25% of us have errors in our credit reports that could be affecting our credit scores. If you do find errors in one of your reports, it’s important to dispute them. There are forms on the websites of the credit bureaus for this purpose. But it’s best to write to the appropriate bureau making sure to enclose any documentation that proves your claim.

The types of information that needs to be repaired

There are three types of information that you will need to repair.

  • Past due accounts that are late, that have been charged off or have been sent to collections
  • Incorrect information such as accounts that aren’t yours, payments that have incorrectly been reported as late, etc.
  • Maxed out accounts or those that are over their credit limits

Tackling accounts that are past due

The biggest factor in determining your credit history is your payment history as it makes up 35% of your score. If you have several past-due accounts on your credit reports they are significantly damaging your credit score. This means that taking care of them is crucial. Your objective should be to fix all your past due accounts that have not yet been charged off so they are reported as “current” or at least “paid”. You can save any debt from being charged off that’s less than 180 days past due. To do this you will need to contact your creditors to see what you can do to become current. In some cases, your lenders might even be willing to waive some of the late penalties or spread your past due balance over a few payments. Be sure to let them know that you want to avoid charge-offs but will need some help. This means actually talking to them to negotiate.

Accounts that have already been charged off

You’re still responsible for charged-off accounts. The good news here is that as those charge-offs get older they will have less of an effect on your credit score. However, the outstanding balance on one of these accounts will make it difficult – or even impossible – to get new credit and loans. This means an important part of your credit repair must include paying charge-offs.

When you pay a charged-off debt, your credit report will be updated to show your account balance is now $0 and the account is paid. The bad news is that the charge-off will continue to appear on your credit reports for seven years from the date the debt was charged-off. An alternative to this is to try to settle the charge-off for less than your original balance. If a creditor agrees to accept your settlement offer it will then cancel the remainder of your debt. However, the status of your debt as “settled” will also stay on your credit reports for seven years.

What to do about collection accounts

If you have accounts that have been sent to collection, then paying them off is much the same as for charge-offs. You could pay the debt in full and try to get a “pay for delete” in the process or try to settle the account for less than your balance. Again, the collection will stay on your credit report for seven years.

Fix your credit utilization ratio

The second largest component used in calculating your credit score is your credit utilization ratio. This is the amount of credit you have available divided into the amount you’ve used. For example, if you have total credit limits of $8,000 and have used $4000 of it, your credit utilization ratio would be 50%, which is too high. If you find that you have a high credit utilization ratio you should focus on paying down some credit card balances as this will improve your ratio and ultimately your credit score.