Debt Settlement Plans
August 16th, 2010 by A Licensed Insolvency Trustee
I have written quite a few pieces were I am critical of the “debt consulting” industry and persons presenting themselves as credit counsellors when they have little or no formal education or credentials. It’s not that I begrudge any of these people a livelihood – I just wish they’d pick a career that doesn’t involve gouging an already desperate portion of the population.
If you are unfamiliar with the term debt settlement it generally means some sort of negotiated deal to repay a portion of your debt. The service is real – most creditors will accept a partial repayment, particularly in a lump sum, once your debt has gone into collections. The trick here is one of timing. The debt settlement companies charge an upfront fee plus a percentage of the settled debt. They pay themselves first before they actually settle with your creditors and they can’t settle with your creditors until they have “saved up” enough of your payments to offer a deal.
That’s a bit confusing, so an example might help. Let’s say you owe $50,000 on your credit cards. The debt settlement company tells you they can settle with your creditors for $25,000. The upfront fee is $2,000 and they’ll charge another 20% of the settled amount – $5,000. Let’s say you agree to $1,000 a month. So the first 7 months will go to pay them and then your payments will go into a savings account until they accumulate enough to offer one of your creditors the 50% deal. During this time you have no legal protection and in many cases the creditors simply proceed to collections and then take legal action against you. To stop the legal action you end up filing a consumer proposal or perhaps bankruptcy (of course you won’t get any of the money back from the debt settlement company).
An alternative might be a consumer proposal whereby you offer the same settlement (50%), but it would play out quite differently. A consumer proposal can be spread over five years which would give you a much lower payment. Just to keep the comparison similar though, we’ll say you can pay the $1,000 per month. Your proposal will run for 25 months (the debt settlement plan would run for 32 assuming the creditors don’t cut it short). By law, the fees for the trustee are taken directly from the settlement; they are not added on top. In addition, after the preparation fee has been paid, $1,500, a trustee only receives payment when the creditors are paid – not in advance. Further, all of the creditors receive payments at the same time – you don’t settle with one, then save up and settle with the next. Most importantly, if you file a proposal you have legal protection from wage garnishees, collection agents and other legal actions.
If you’ve responded to a debt settlement ad and/or are actively considering this solution for your financial difficulties please make certain you understand the process that the company you will be dealing with is going to follow. As long as you understand the risks and the pitfalls of a debt settlement plan then you can add itn to the list of options to deal with your debts. Most people don’t take the time to “read the fine print” and as such go into these plans with high expectations only to have their creditors continue to pursue them, including collection actions and wage garnishees.
Be careful and consider all of your options before you sign.
One Response to “Debt Settlement Plans”
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April 05, 2012 at 2:08 pm, Jason said:
I would like to be one to personally warn people as well as I am one of those people who did not read the fine print. Unfortunately I enrolled with the debt settlement company Cambridge Life Solutions expecting to be relieved of my debt within the 3 year term they worked out with me. I felt a little unsure about the whole process and was not made aware of what exactly the “set aside funds” were. I did ask many questions and they reworded things and often changed the subject to assure me it was the right decision to make. I was told like in the article, my creditors would be contacted as soon as I signed a legal power of attorney but later found my creditors calling me telling me that’s all they received from Cambridge Life Solutions. Long story short, today I’m being sued by my creditors due to neglect of payment or breach of contract whichever you prefer and currently have no more alternatives other then to seek bankruptcy as my only option. The sad part of it all is the payments I was making to Cambridge were slightly higher then my minimum payments to my creditors. I was simply tired of having to dip into my credit and seeing that it would take me 108yrs (based on minimum payments) to repay my creditors. If I could have done it over I probably would have considered a consumer proposal now that I’ve learned from experience and am more educated on these financial matters. I would like to wish everyone with these kinds of struggles the best of luck and thank-you for taking the time to read my personal story. I really hope it helps!