Some Debt Settlement Companies May Provide Unmet Expectations

First of all the customer needs to display the traits of a true debt settlement situation. Usually valid reasons for entering into a debt settlement program include loss of job, loss of income, divorce, sickness in the family, etc. They also need to be very late on their payments. Assuming the customer passes the first litmus test there are a few more options that are supposed to be explored first.

Simply being overextended is not a true reason to go into a debt settlement program. Usually someone who is overextended has perfect credit and is robbing Peter to pay Paul. That doesn’t automatically qualify. That customer really should look at consumer credit counseling and/or a good old fashion refinance first.

Consumer credit counseling is when the creditor takes the amount owed and reduces the interest rate and puts the customer on a fixed payment plan. Usually the interest rate is squashed to about 7% and the term of the loan is 4 or 5 years. This is not a bad option because typically minimum payments on a credit card take about 19 years to pay off the balance. The customer’s credit will show that they are in a plan but certainly the credit is not whacked like it would be with a true debt settlement program.

I recently had a customer who was so abused by a rogue debt settlement company. She had limited means and was overextended with about $20,000 in consumer debt. She owned a home worth $110,000 that had a mortgage balance of $30,000. She was completely naïve to what she was getting into and could have been helped much easier with a refinance and not a debt settlement. A good debt settlement company would tell her that. Many good debt settlement companies have a mortgage arm that can help that customer. This customer entered into the program and faithfully made her monthly payment for about 4 months. Obviously no one explained to her that the money doesn’t go towards the cards until a lump sum is saved up. By the time she realized this, her credit score went from 720 down to 580 and now she cannot even do a refinance. The worst part of this is that she is still having a hard time getting her money back. The company told her that she is owed nothing when in fact she is entitled to the money sent in less commission.

Depending on the state, most debt settlement companies front end load their commissions because they know many customers don’t stick with the plan. The commission is typically 15% of the total debt but in some cases, if you are dealing with an attorney, the commission can be as high as 18%. Before signing the paperwork you should be shown a schedule of how the money will be applied to your savings account and how much will be taken away as commission. On the average, if you are entering into a 36 month plan, all of the commissions will be grabbed in the first 14 months. Your credit is trashed until you complete the plan three years later.

A mortgage refinance will payoff debts in a month and the cash flow savings can be sent as a principle payment so you begin to pay your mortgage down all over again. Credit is improved immediately rather than being trashed for three years.

Written by Preston Ware of First South Mortgage
Tel: 704-542-8057
* www.prestonware.com
Email is preston@prestonware.com.