||Ask Dr. Don
A negotiated settlement is not debt consolidation
Dear Dr. Don,
I have been talking with a company about debt consolidation. They
say they can take my current unsecured debt of $24,500 to $14,500.
This would reduce my monthly payments from $560 to
$360 and would allow me to pay off all bills over the next 40 months.
What questions do I need to ask, and would you suggest anyone else?
Debt consolidation is when you take your current outstanding consumer
loans and combine them into one loan. Debt consolidation helps consumers
if the consolidation loan can reduce the effective interest rate
or extend the loan term.
This company isn't really offering debt consolidation;
they're offering to negotiate settlements with your unsecured creditors.
Creditors will take partial payment if they can't realistically
expect to get any more than that, but don't expect this to be a
painless approach to debt repayment or credit repair.
The company states that they will get your creditors
to state that the account was "paid in full" on your credit
report. That won't erase the "credit not paid per agreement"
listings on that report.
From its Web site, it appears that the company requires
you to make monthly payments into a trust account, which is outside
the reach of your creditors. You stop paying the bills on your unsecured
credit, money goes into a trust that you don't control and creditors
have to negotiate with the trustee to get a payment from the trust.
That's where the company creates the leverage to get the creditor
to agree to list the account as being "paid in full."
I don't see how this process protects you from judgments
or the potential garnishment of your wages, but I'm not an attorney.
By the way, the debt-negotiating firm isn't acting as your attorney
either and suggests that you hire an attorney if you have legal
questions. At a minimum you would want an attorney to review the
Federal law protects you from being dismissed from
your job for garnishment relating to a single debt, but multiple
garnishments can be a justification for dismissal. State laws concerning
an employer's ability to terminate based on multiple garnishments
If you can't pay off your debts without getting your
creditors to accept partial payments, then bankruptcy law offers
you the ability to discharge your debt in a Chapter 7 filing or
to design a repayment plan in a Chapter 13 filing. Desperate times
call for desperate measures, but don't count on being better off
using a debt negotiator instead of a bankruptcy attorney.
Being debt-free is different from having the ability
to get credit. Despite the assurance of many debt-negotiating firms
that your credit reports will reflect that your unsecured accounts
that have agreed to settlement will be marked "paid in full,"
that doesn't mean that you'll have a good credit score or the ability
to get a loan.
While bankruptcies stay on your credit report for
seven to 10 years, individuals who have filed for bankruptcy can
usually rebuild their credit history to the point where they can
once again get a loan in two to four years. That's not much different
than your 40-month solution using a debt negotiator.
I don't know enough about your financial situation
to advise you on what your next step should be. The fact that you're
considering debt negotiation to save you from repaying an estimated
$10,000 in debt should mean that you're in way over your head.
If that's the case, you should consider bankruptcy
as an alternative. If that's not the case, stop trying to finesse
the reduction of these debts and find a way to repay them instead.
-- Posted: May 30, 2002