- What is the different between a debt workout and a
debt consolidation for reduction or elimination of credit card debt and
other unsecured debt?
- For the context of this discussion I refer to a credit
card debt workout as a negotiated settlement of credit card debt. For
example if you owed $5,000 on a credit card and made an agreement with the
credit card company to pay $2,000 instead of $5,000 as settlement in full
on the debt, this would be a credit card debt workout. Firms who perform
this type of work may identify themselves as debt management, debt
reduction, debt relief, debt workout, debt settlement or a host of other
names inferring they help with debt even sometimes including debt
consolidation. However, I personally define the specific term debt consolidation as a reorganization of
the debt through a credit counselor or taking a debt consolidation loan to
pay of the debts in full. Where those with credit card debt achieve debt relief by paying less than they owe I like to call it debt settlement. Other FAQís at Bankruptcy Alternatives address each of these
debt elimination options individually or read summaries of options at Debt Help Solutions.
- Who is eligible for a debt workout to get out of
credit card debt?
- Creditors agree to debt reduction arrangements where
they feel a settlement of the debt will be in their best interest. In most
cases they come to this conclusion because the person requesting the debt
negotiation appears to be a legitimate candidate for bankruptcy. Knowing
that in most bankruptcy cases they would receive nothing, they opt to take
a discounted settlement on the debt rather than receive zero dollars in a chapter 7
bankruptcy. The consumer gets debt relief, the creditor get some money, and everyone ends up better than their worst options.
- What kinds of people appear to be bankruptcy
candidates to the creditors?
- 1. People who have shown an inability to pay their
debts as evidenced by their failure to make payments for several months on
their credit cards and other obligations. In other words, those who already meet the definition of bad credit.
2. People who do
not have assets to protect such as equity in homes and cars.
3. People whose
current or future income would not allow them to reorganize their finances
either through a Chapter 13 or a plan outside of bankruptcy.
- How do the creditors find out about this information
- When you applied for credit, in most cases, you
authorized the creditor to inspect your credit report when necessary. As
part of the collection process in determining proper resolution option for
your debt most creditors will run a credit report. The creditor obviously
knows of your own debt payment history with them. The credit report will
allow them to see how you are treating all of your other creditors. For
example if you have ten credit card accounts and are current with all of
the others they will make the assumption that you are capable of paying
them as well. On the other hand if you were delinquent with all of your
other credit card debts it would seem to indicate that you do not have the
ability to pay anyone including that particular creditor and you indeed require debt relief.
- How could they find out about my income and assets?
- As a starting point they will use the application
that you used to obtain the credit card in the first place. Beyond that,
although there are some public records and some information on a credit
report. For even more data you will have to provide the creditor with this
information yourself. Some creditors will never ask for this information,
others will ask for it before any debt reduction negotiation begins and
others will ask for it depending upon the status of the debt reduction
- What would trigger them insisting on my income and
asset information as a part of the debt settlement negotiation?
- Imagine that after only seeing a credit report and
some preliminary information the creditors make what you might consider a
high debt settlement offer such as 75 cents on the dollar. In order to
persuade them to take a debt settlement less than their initial offer they
might demand further evidence of your financial hardship including
financial statements indicating income and assets. Then, with evidence in
hand proving the personís lack of ability to repay the debt, to the
creditor may consider a debt reduction allowing a pay off of the debt in a
much lower range. The bank may accept that you need debt relief, but even than they take the stance that they want to give you only as much debt relief as you might need to avoid bankruptcy and no more.
- Would a typical credit card debt account accept to
pay off the debt?
- Most of credit card debt accounts settle in a range
of 30 to 50%. Be aware that some credit card debt accounts may settle
considerably higher reaching into the 75 to 80% range while in rare cases
credit card debt accounts can be settled in the 20 to 30% range. In very
rare cases I have seen debt solutions agreed to for as little as 5 to 10%
or as much as 90 to 95%.
- What would determine differences in the debt
- While a personís own financial situation would have
an important effect on debt reduction figures the next most important
factor would be the internal debt settlement policy of the creditor.
Prediction about the internal policies of these creditors cannot be made
on their size or the amount of the debt necessarily, but they are
consistent in their own policies. For example MBNA, American Express and
Citicorp may all be major players in the industry and all of a large size
but their policy on debt settlements are quite different. On the other
hand the way American Express treats each of their own customers
individually is fairly consistent in terms of their own internal debt
settlement policies. Therefore someone who works with these creditors
everyday would know what to expect from each individual company when putting
together a debt management plan.
- Do credit card debt settlements need to be made all
at once to achieve debt elimination?
- With most settlements you do need pay off the each
individual credit card debt all at once in a lump sum by paying the creditor
the reduced debt settlement figure they have agreed to with your debt
negotiation firm. There are two significant exceptions that debtors should
be aware of. First is that in some cases the creditors will arrange a
short payment plan, especially with larger amounts of credit card debt.
These plans might range any where from three to six months to pay off the
credit card debt. The other exception comes in the form of special debt
management or debt reduction companies, which arrange to stretch debt settlement
plans out of a period of one to four years. These debt relief companies
will be discussed later in this article.
- How does this type of credit card debt workout affect
- It depends on the status of the debtorís credit
before the debt workout. Letís imagine that credit report scores run on a
scale of one to 10, one being the best. Only ranks of one and two are good
enough to walk into most local banks to get a loan or credit card. Someone
who has done a credit card debt settlement would be considered near a six on this scale immediately after the pay off of the credit card
debt settlement. For someone who started as a one or two this would be a
dramatic devastation of their credit. Anyone with good credit should
consider the debt workout as an option very seriously before undertaking
it, as his or her credit will be essentially destroyed. On the other hand,
if an individual already shows multiple accounts on their credit report
that have been charged off by creditors they may already have a credit
score of approximately nine on a scale of one to ten. For these people
settling the charge off accounts through debt settlement would actually
improve their credit. This does not mean it will make their credit good,
it just means it will improve it from very very bad to only plain bad.
- Can a person achieve these credit card debt
settlements on their own or do they need to hire a debt reduction
professional to get out of the credit card debt?
- While it is certainly possible for someone to achieve
a credit card debt settlement on their own I do not recommend it anymore
than I would recommend somebody taking out their own appendix. In the
first place creditors do not take the situation nearly as seriously when a
debtor calls to make a settlement as when a debt relief professional, such
as a bankruptcy attorney or debt management firm calls to make a debt
settlement. An individual would not know how to negotiate a debt
settlement or what a proper debt settlement would be. A debt management
professional working in this field would know most individual creditors
including what their standard acceptance offer would be. In order to
achieve the proper credit card debt settlement it is important to
understand the proper way to fill out certain financial forms, most
individuals do not know how to do this properly. A debt reduction
professional also knows what to say, what not to say, what to ask for and
what, to a creditor, would be a ridiculous request. Credit card debt
settlements are best achieved when the creditors standard operating
procedures and formats are followed. An individual would have no idea how
to go about following such debt solution procedures. It is harder to
negotiate one of your own credit card debt accounts because of the
emotions involved when negotiating for yourself. Even amongst lawyers it
is said that the lawyer that represents himself has a fool for a client.
This is the case for either a lawyer or non-lawyer negotiating debt
settlements on their own behalf. When someone else is negotiating for you
the calls from the collector and letters end up going to the debt
management professional you have hired to work for you making the entire
debt settlement process less stressful. It is disturbingly common for debt
collectors to try and do things, which may be industry tricks or
potentially fraud in order to get you to pay off debt in full. Some of
these things may include getting you to reveal information about yourself
you may have no obligation to reveal or having you to send money you have
been told would be settlement of the debt in full only to find they have
lied and simply taken the money on account.
- What if the creditor initiates a credit card debt
settlement offer directly to the debtor?
- In most cases the first debt settlement letters
coming from the creditors are initial attempts to make contact the debtor
combined with a debt settlement offer that the creditor deems high, but
certainly one the credit card company would be happy to accept. A typical
case would be a creditor offering a settlement of 75 or 80 cents on a
dollar. In almost all cases debt settlement can be achieved for less than
the offer made in these initial contact letters from the credit card
- What if I have gotten a series of letters from the
credit card company and the offer keeps getting better, at what point
should I take it as a viable debt elimination solution.
- This answer depends on the creditor. A debt reduction
professional working in this field would know the answer based on the
specific creditor. With certain creditors I found when the offer gets low
enough, although better settlements can be achieved, when one looks at the
fees to pay the debt reduction professional and the difference in the debt
settlements the end result is fairly close. In these cases I have
personally told clients to except offers and make sure they followed the
proper procedures. Although I must say those cases are quite rare. You also need to watch out for what the letters really want. While they may look like an offer of debt relief, sometimes offers to accept a small payment as a deposit toward settlement are designed much more to extend the statute of lititations more than make in dent in your cardit card debt. Other firms may send what looks like a settlement only to inform you that what you paid represents a partial payment on the total debt and the entire amount remains due in full.
- How long does the card debt settlement process take?
- A normal credit card debt settlement case might take
three to nine months. If someone wanted to expedite the situation it could
be shortened to one to three months. Someone wishing to stretch things out
could find the time extended to twelve to eighteen months. Some special
debt management and debt reduction firms can even lengthen the process to
four years or more.
- Why would someone want to stretch the credit card
debt negotiation process out longer?
- In order to get more time to get debt settlement
funds accumulated. For many people the only options to get out of debt are
four-year settlement times or bankruptcy.
- Are there any downsides to lengthening the credit
card debt negotiation process?
- 1. As time goes on interest builds on the outstanding
credit card debt. Even if the credit card debt ends up being settled for
50% interest building at 20% on the total outstanding credit card debt
still means a significant increase in what you will pay as a debt
2. At some point
you will want to begin rebuilding your credit. This process cannot and should
not begin until all of the old credit card debts have all been settled.
3. Laws, your
own personal situation or creditor policies can change so that a credit card
debt settlement, which might be archived now, can no longer be reached in the future.
4. The longer
things go after the credit card company has started litigation in the court
system the more likely it becomes that a creditor will refuse to participate in
your debt settlement plan and you must settle a credit card account for more than
you might want to or you will face a court hearing and its consequences such as
- How do these debt settlement firms work to get you
out of your credit card debt over a term of years?
- First they access your own financial situation to
determine if you would be a good candidate for their debt settlement
program. Be aware that some of these debt reduction firms will try to get
you signed up because that makes the debt management firm money, not
because it truly represents the best debt solution route for you. To help figure out what might be best
for you to reduce debt I have written the Debt Advice Free software system.
- Suppose the debt settlement option does work best for
me and itís what I want to do to pay off the credit card debt and achieve debt relief.
- Together with the debt settlement firm you will
establish a master plan to help deal with the credit card debt including
how long the debt elimination process might take, and how much money you
will need to make the credit card debt reduction plan work.
- Who do I pay to get out of my credit card debt and
when do I pay it?
- This varies with each debt management company. All
credit card debt reduction plans will provide both for payment to the
creditors and payment to the debt settlement firm. Payment to the debt
relief firm can be on a flat fee basis calculated as a percentage of the
total debt or a percentage based on the money saved through debt
settlements. Payment of these debt reduction fees can be paid up front,
over time, or when debt settlements are reached. Money to pay the
creditors can be kept by the debtor until it may be needed or held in
escrow by the debt negotiation firm.
In many cases these debt settlement funds build up by the debtors adding
to them each month.
- Is it better to accumulate credit card debt
settlement funds on my own or allow the debt management firm to keep them
in escrow for me?
- Before answering that question debtors
should be aware that with many of the credit card debt reduction firms how to
accumulate the debt settlement money would not be an option. Some debt relief
firms require everyone to accumulate money on their own while other debt help
firms require their own organization hold the debt settlement monies in escrow.
The question of which method to use will be applicable only with those debt
negotiation firms who offer the choice. This information may also play an
important role in selecting which debt elimination firm to use. For example if
a debtor feels very strongly about how to accumulate the debt settlement monies
they may want to only contract with a credit card debt settlement firm that
handles the escrow using the debtorís preferred method. With that in mind I
will outline the proís and conís of each method, but which will work for any
given individual debtor will vary on the debtor's own circumstances. Holding debt settlement
money in escrow yourself eliminates any worry that a stranger you have
entrusted with your funds will miss-handle them or be abscond with them. On the
other hand for many people the greater danger lies in holding the debt
settlement funds themselves. Because rather than accumulate the money to be
used for a settlement of debt as intended, they themselves will use the funds
for other purposes. Even usage of the debt settlement funds for purposes they
may feel valid at the time will still result in there being no funds for debt
settlement when the need arises.
- How do these credit card debt reduction
firms stretch pay off settlements out over a term of years?
- This results from a combination of waiting
for the creditors to start an action, long term and high volume relationships
between the debt management firm and the creditor and various other trade
secrets of the debt reduction firms.
- Is what the debt relief firms do work out long-term
debt payment plans to pay off the creditors?
- Not really. More commonly the debt
management firm or the debtor accumulates debt settlement funds until a
particular credit card debt can be paid off at a negotiated discount. Then that one credit card account gets
settled and the process repeats until all credit card and other unsecured debts
in the debt management plan have been taken care of.
- Who decides which debts to settle first?
- While the debtor and debt settlement firm
work on this together the decision frequently ends up being decided by the
creditor who seems to be closest to starting litigation to collect their debt. Remember that good debt relief firms do quite a bit of this type of settlement, so they usually know in advance which of your particular creditors might get aggressive and when.
- Can these credit card debt reduction firms
stop creditor law suits the way a bankruptcy filing can?
- No. Debt management firms can only stop
credit card companies by having them agree to a negotiated debt settlement or a
delay in the litigation. They cannot force them to do anything.
- What happens if the creditor wants to
proceed in the courts to collect the debt?
- In most of these cases the impending court
action acts as a catalyst the speed a debt settlement; in some cases the
pressure even produces higher debt settlement figures for the creditor. In some
cases the creditor gets a judgment but nothing else happens. In some cases the creditor gets a judgment
and attempts a wage garnishment or other further court action to get the debtor
to pay off the debt. In some cases the court action forces the debtor into
filing a chapter 7 bankruptcy or a chapter 13 bankruptcy as a debt solution.
- I'm talking to a debt settlement company that claims they can stretch the debt elimination plan to five years and, in fact, that most of their debt reduction plans run five or even six years. The longer plan works much better for my finances, why shouldn't I go with a debt plan like that?
- First, most credit card debt situations can only be settled over one to three year time frame. After that most creditors will begin law suits which lead to wage garnishment and worse. Many debt negotiation firms claim they can make a settlement plan that you can pay over five years. Take that claim as a sign you might be talking to a disreputable debt settlement company. Second, if your budget dictates that you need to put the debt settlement payments over five or six years to make a debt elimination plan work than you should look at adjusting your budget or examining other options for dealing with your credit card debt, perhaps even calling a bankruptcy lawyer.
- How much do these credit card debt reduction
- On average I find rates for credit card debt
reduction firms range from 8%-15% of the total outstanding debt. Some credit
card debt relief firms will calculate the fee based on what they save the
debtor through their negotiation with the credit card companies based on a fee
of 25%-33% of the savings.
- Do these credit card debt reduction firms
guarantee their results?
- Not in most cases.
- Do these credit card debt management firms
generally do what they say they can?
- At least with the credit card debt
management companies I have worked with, they almost always achieve debt
settlements with the creditors. In the vast majority of cases the debt
settlements come within the estimates given by the credit card debt relief firms
- What happens when the credit card debt
reduction company cannot settle an account?
- This almost never happens. Sometimes the
credit card debt reduction firm will put an account off to settle it in the
future if they think more time or a change in account status will produce a
better debt settlement. Sometimes the credit card debt accounts settle higher
than the projected range, but they almost always settle.
- When are the credit card debt management
- With some credit card debt reduction firms
all in advance, with some debt relief firms over time and other debt
negotiation companies only when things settle.
- What happens if I miss a payment to the
credit card debt management company?
- Things can be much more flexible than they
would be with a creditor but to stay on the plan you will have to make the
- Can I still file a bankruptcy if I try the
debt settlement and it does not work?
- Yes, but the money you will have spent on
the credit card debt settlements prior to you filing the bankruptcy will be
gone forever. This illustrates why you should try to make a master plan to pay
off your credit card debt you can follow all the way through and stick to it
until you complete it.
- Will I still get debt collection calls from
- Creditorís debt collection calls should go
straight to the credit card debt negotiation firm. Sometimes you will get a
debt collection call by mistake and sometimes the creditors will try to sneak
around the debt settlement firm. Once
you have hired a credit card debt negotiation firm simply tell any creditor
that does call you have hired a debt relief firm to help, give the creditor the debt
settlement firmís name, instruct them to call your firm and politely hang up
the phone. Do not engage in a conversation with the creditor or their debt
- What if the creditors and debt collectors
keep calling me even after I have told them to stop?
- They may become liable for damages under the
Fair Debt Collection Act.
- After I pay the negotiated debt settlement
amount can the creditors still chase me for the balance of the credit card debt
- No, that is what a credit card debt
settlement is all about it represents full satisfaction of the debt, but having your paperwork set up properly so that you get the debt relief you expected shows another reason to have a professional debt relief company do the negotiation.
- Do these debt reduction firms only work with
credit card debt?
- Debt relief firms may also work with medical
bills, auto deficiencies or other similar unsecured debt. Some firms offering
debt management will only work with credit card debt. Student loan debt help is
generally not available, and when student loan debt relief is available the
only items for possible reduction in most cases will be the interest and
penalties. Debt negotiation firms who
work with secured debt such as mortgages and car loans do exist but most often
are not the same firms who specialize in credit card debt. If you need advice on avoiding mortgage foreclosure you need some one who specializes in negotiating mortgage debt. That system operates in very different ways than a credit card debt settlement. To get more help with a foreclosure or mortgage debt read that FAQ or the free articles at Stop Home Foreclosure Help.
- How can I tell if a debt reduction program
where they will settle my credit card and other unsecured debt accounts is the
best way for me to get out of debt?
- I have put together an intelligent debt analysis program to see which of these debt
elimination programs based you own personal debt, income and asset situation or you can fill out a form to have a debt settlement professional call to talk to you about their services. These firms do not charge a fee for initial analysis of your credit card debt situation. You may also wish to read about various solutions for your debt or use a form to use a form to hear from professionals providing various debt solutions and decide on the best plan after hearing what they each have to say. Keep in mind that to achieve successful long term credit card debt relief you must evaluate and change any bad personal spending habits to insure you don't end up in trouble again.
Lifestyle | Real Property and Other
Hard Assets | Foreclosure | Cash, Stocks, IRAs
and Other Soft Assets | Secured
vs. Unsecured Creditors | Credit
Debt Workout Mortgages & Secured Debt | Credit Card & Unsecured Debt | Bankruptcy | Do Nothing | Deed in Lieu of Foreclosure | Do Nothing Home Forclosure | Pay
Creditors in Full | Debt Consolidation Loan | Non-Profit Credit Counseling | Credit Card Balance Transfer
Consolidation / Debt Settlement Program - Consolidate your credit card and unsecured personal debt with a program to settle balances for 30-50 cents on the dollar. Make monthly payments toward the total settlement over a period of years. Free initial consultation. Learn more and see if your situation fits the program online.
A Guide to Borrowing Money with Bad Credit
- Including informational articles on obtaining a home mortgage, auto loan, credit card or unsecured personal loan.
Credit Cards For People With Bad Credit
- Read either informational articles on obtaining any type of bank card or credit card with bad credit, including a definition of what is bad credit or look at a complete set of FAQs dealing secured credit cards.
Credit Repair and Credit Rebuilding -Credit repair and credit rebuilding article. Topics include how to repair your credit and warnings about credit repair scams. Links to other credit repair sites and professional credit repair services plus my own Free Guide to Help Repair and Rebuild your Credit Report. For more credit help try 14 Do's and Don'ts To Raise A Score Fast or the Credit Score FAQ.
to pay when you can't pay everyone - An
article addressing cash allocation for debtors.
How to Get money when you need money - Examines WHEN you really NEED money and how to get money even with bad credit for an emegency or financial crisis.
Stop Home Foreclosure Help - Articles to better understand the foreclsoure process and how to avoid a foreclosure including an interactive tool to analyze your own situation and point you in the right direction to keep your home, a list of various ways to halt a foreclosure, a list of 10 mistakes to avoid when facing foreclosure and foreclosure myths.
Personal Home Budget Analysis - An interactive tool to learn where your money REALLY goes. Input your income and expenses, the program will automatically determine if you have accounted for all you have spent. When you have discovered all your expenses you will be know the details of any overspending. Use this information to help plan and keep a monthly budget or change spending to avoid further debt or bankruptcy.
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