Getting Out of Debt the Right Way

Getting into Debt

Fred and Sue Simmons’ story is typical. In the late 1990’s, Fred was a human resources consultant who owned his own business and worked on a contract basis. Sue worked for a small, local company that paid her a small but consistent salary. For Fred, some months were very good, while some months saw him bring in nothing.

Like many people, Fred and Sue had several credit cards, including American Express, Visa and MasterCard and a few store cards. They paid the minimum or a little more each month, and every month they told themselves that they would eventually pay down their debt with lump sum payments.

 

“It was so easy to keep charging,” Sue says. “Every month we had such good intentions, but each month there would be something else that needed our attention: car repairs, pet expenses, clothes or shoes for the kids, hospital bills, etc. Sometimes we charged them on the cards, sometimes we just paid them with the money we had set aside to pay the cards down. And every month the interest – and sometimes late fees – climbed.”

Severe Debt Became a Crisis

Things might have continued like this for a long time, but on September 11, 2001, the financial world was changed by the attacks on the World Trade Center and Pentagon. Overnight the job disintegrated and Fred’s consulting business died. The couple drained their savings, then their IRAs and mutual funds just to pay the mortgage and the bills.

They plodded along for a few years barely making minimum payments while Fred rebuilt his business. But it soon became clear that it wasn’t going to be enough. They had to get out of debt.

Debt Reduction Company Offered Options

Fred called a few of the consumer debt reduction companies advertising on television. He settled on one called United Debt Solutions. The couple signed a contract agreeing that the company could debit their checking account $365 a month for eighteen months. In return, the company would work with the Smiths’ creditors to reduce their debt. In retrospect, Fred says he should have realized something was wrong, but he was desperate.

Credit Adversely Affected

It started out well enough, and the Smiths paid off over $10,000 in debt settlements using lump sum payments from Fred’s business. However, during the process of working with United Debt Solutions, the Smiths found out that almost all of their creditors would have worked with them, offering lump sum payments equal to or better than what United Debt Solutions negotiated for them.

Even better, they could have worked with a non-profit credit counseling agency. Either option would have allowed them to use the $6570 they paid to United Debt Solutions to pay off other bills.

Not one penny of the $365 went towards paying off debt. Instead, that $6570 went into the company’s coffers. Meanwhile other bills continued to accrue. At the end of the 18 months, the Smiths still owed over $15,000 in medical, utilities, and credit card debt and their credit rating was ruined.

Contact Your Lenders

If your financial situation has changed or just gotten worse, contact your credit card companies, mortgage company, utilities, and anyone else you owe. Explain the circumstances and ask what they can do to help. Some credit card companies will cut your interest rate, or will give you a reduced minimum payment for a set time to allow you to get on your feet.

Some credit card companies will work with you to offer a sum to settle the debt completely, but, according to Leslie McFadden of Bankrate.com, usually only if they are desperate for a payment.

Mortgage companies have the ability to modify your loan to extend the length of the loan, often dropping the monthly payment. They can also place a delinquent loan in temporary forbearance. This means that you will pay a certain amount more each month until your back payments are caught up.

If your mortgage company is willing to do this, make sure that you completely understand and comply with the terms of the modification or forbearance, as breaking these terms is cause for them to accelerate the loan and place the account into foreclosure.

Consumer Credit Counseling

If you get nowhere with your creditors, consider enlisting a professional to help you. Look for a non-profit consumer credit counseling agency that is an accredited member of the Association of Independent Consumer Credit Counseling Agencies (AICCCA) and which has an A rating or higher from the Better Business Bureau. There may be a small fee for enrollment in the program, and a monthly handling fee, which is usually less than ten dollars a month. Because they are non-profit, however, any monies you turn over to them will go towards paying off your debts, not their fees.

Some of the services that consumer credit counseling agencies offer are debt consolidation, debt management, and credit counseling.

Avoid Getting Scammed

If you do decide to use a debt relief company, the first and most important thing you should do is to check that company’s Better Business Bureau rating. In addition, carefully check each complaint against them, noting whether the complaint was settled and whether it was settled satisfactorily.

If the company has not been around very long, they will not have a rating, or might have a good one simply because no one has had time to complain about them. Be leery of dealing with any company that does not have an established track record.

Additionally, check to see if the company is a member of The Association Of Settlement Companies, also known as TASC. While this does not guarantee that the company you are researching is reputable, it does provide you with more information on which to base your decision..

Current Status

The Smiths eventually canceled their last credit card and no longer purchase anything that they cannot pay for with cash. They enrolled in a consumer credit counseling program to help them deal with remaining medical bills, and are still struggling to repair their credit. Their experience has taken a toll on them, but they are both optimistic. “It’s an incredible feeling of relief to pay off each bill, knowing that we will eventually be free of these debts forever,” Fred says.

United Debt Solutions is under investigation by the Office of the Florida Attorney General for failing to pay off their customers’ debts as promised and for making unauthorized withdrawals from customers accounts. The case against them (“In Circuit Court of the Fourth Judicial Circuit, Clay County, Florida,State Of Florida, Office Of The Attorney General, Plaintiff, v. John J. Hacker And Christa L. Caparella, Defendants,” Case No. L07-3-1122) is pending.

Updated: January 18, 2019 — 7:13 pm

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