More and more Loan Originators I speak with are asking about debt settlement. Past and prospective clients are asking for help with consumer debt. They are worried they may soon be unable to make the minimum payments (or may have already fallen behind), they can’t consolidate debt like they had in the past using home equity, and they want to avoid bankruptcy.

What do you tell your clients?

Can you point them in the right direction when they need help managing or eliminating their unsecured consumer debt?

Can you tell them the difference between bankruptcy vs. debt settlement vs. consumer credit counseling?

If you consider yourself a mortgage planner or advisor to your clients, it’s important you understand what options they have available to them in managing and eliminating their debt.

Basics of Debt Settlement

Debt settlement is a legitimate option for consumers struggling with consumer debt who are looking for an alternative to Chapter 13 Bankruptcy.

The basic premise of debt settlement involves redirecting required monthly payments intended for creditors into a separate settlement account. Existing assets/savings can also be used. Once enough money has been saved, the negotiations begin. While specific results will vary, the goal is to settle a consumer’s debts for 50% or less of what they owe.

We’ll take a very simple look at the numbers (not taking into penalties, additional interest, fees, etc).

Let’s assume you owe $35,000 in credit card debt. Your minimum monthly payment is $700.

You can’t afford it.

You’ve stopped paying your creditors and start to put $500 a month aside for purposes of settling.

You have $6,000 you can pull from a ROTH IRA without penalties.

In 16 months, you’ve saved $8,000 (not including the $6k from the ROTH IRA).

You successfully settle for 40% of the original $35,000 saving yourself $21,000.

Sounds simple, right?

Unfortunately, many consumers who hire a third party debt settlement company are either not good candidates for debt settlement — or hire the wrong company.

Like in many industries that cater to financially desperate people - there are a lot of bad apples. In September, the FTC held a workshop to discuss the grossly unregulated industry. News reports of debt settlement firms being shut down or fined are not uncommon.

Bankruptcy winds up being inevitable for some. They owe more at the end due to interest costs and penalties than they did at the beginning of the process.

Some consumers tackle debt settlement on their own - but underestimate the process, risks, or the length of time it may take. Some are wildly successful.

In the next post, I’ll begin to cover some of the pitfalls associated with debt settlement. I’ll follow that up with some of the benefits. I’ll wrap it up with what I would look for in a debt settlement company.

In the meantime, feel free to contact me with any specific questions or if you need a referral to a reputable debt settlement firm. I hesitate to say this, but I know some will ask - yes - some will even compensate you for your efforts.