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Charles Phelan

Debt Settlement in 2025 and Beyond!

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Today is March 27, 2025, which sounds like a science fiction date to this old guy. But I’m still here providing debt settlement services in 2025. I’m still helping consumers struggling with unsecured debt obligations. With the ongoing uncertainty over inflation and the economy, it’s more important than ever for people to have reliable truthful information on debt relief options.

I settled my first debt for a client in 1997, and it’s hard to believe that was 28 years ago! I was one of the first to offer debt settlement for consumers. In those days, debt settlement for consumer debts was brand new. I remember talking with longtime debt collectors who did not even understand what a settlement entailed!

Over the past quarter of a century, I have helped many thousands of consumers face up to their debt issues and seen millions in debt get resolved through negotiated settlements. I’ve also seen the debt settlement industry go through massive turmoil, with changes that have shifted things far more in favor of the debt companies than the folks they are supposed to be helping.

Why I’m Not a Fan of the Debt Relief Industry at Large

I’ve been a part of this industry for a very long time, but I remain pretty disgusted with the manner in which the large debt settlement firms operate. There are several reasons for this. The large companies tend to downplay the LEGAL RISK consumers face from collection lawsuits. Nor do they help manage that risk very effectively. In fact, they add to the risk by using outdated tactics, like sending out notices too early to creditors.

They also try to persuade people that “bankruptcy should be avoided at all costs,” which is very bad advice. Why? Because Chapter 7 bankruptcy is GOOD, and Chapter 13 bankruptcy is BAD. There is a world of difference between a bankruptcy filed under Chapter 7 vs. Chapter 13, yet you will search debt settlement company websites in vain for any discussion of the crucial differences.

The reason they do that is because they aim for the largest volume possible of enrolled clients. Since about 7 out of every 10 people who file bankruptcy are eligible to simply wipe out the debt under Chapter 7, they don’t want to exclude that potential pool of prospects. Sadly, that means they are pitching their program to people who would actually be better off in bankruptcy.

The simple truth is that Chapter 7 is almost always a better option than debt settlement. It is primarily people facing a protracted FIVE YEAR bankruptcy petition under Chapter 13 who should be considering debt settlement instead.

Be Careful When Comparing Fees for Debt Settlement Services

The above problems are bad enough, but then there is the RIDICULOUS FEE STRUCTURE established by the larger companies. Most of them charge a fee that’s a percentage of the debt balances enrolled in the program, typically in the range of 20% to 30% of the debt. The problem here is that this fee method removes any incentive for the company to even bother negotiating a better outcome. If you are going to make the same amount of money regardless of how much or how little work you put in, and no matter the actual result, human nature means that you won’t probably go the extra mile to help out a client.

The best debt settlement fee structure for YOU (i.e., the client) is one based on a percentage of the SAVINGS achieved through the negotiated settlement. In my practice, I charge a very reasonable 20% of the savings off the enrolled balance, and NOT a percentage of the debt itself. Run a few examples through a calculator, and you will quickly realize that this method creates a win-win scenario between the service provider and the client. It also means far more of your hard earned money going toward resolving the debt balances keeping you awake at night, and less going toward paying the marketing costs for some debt company!

Settlement is What the Banks Do Anyway

In 1997 I started in the debt settlement business as a one-person consulting practice with the aim of helping local clientele in San Diego. It quickly became clear to me that settlement is what the banks do to reduce losses on defaulted debts. In the year 2000, I joined the country’s first large scale debt operation and increased their client base from 40 customers to more than 4,000. As I worked on scaling up the company, I learned about all of the problems that a volume approach creates. I also learned that the banks were not very pleased with the existence of debt settlement companies!

I left that firm in 2004 and set out on my again. I created an 8-hour audio training seminar that taught people how to settle debts on their own, minus the big fees. Then in 2016, I went back to offering full service debt settlement again, primarily because I had observed that most people wanted a level of support that exceeded what I could offer through simple education and coaching.

It’s now 2025 and debt settlement is no longer something new or different in the financial world. In fact, the only reason that debt settlement companies exist is because the BANKS are still the ones who want to settle. They do that for two reasons — to reduce a loss that they are about to write off due to non-payment, or to recover against a loss already taken. The basic concept of the “bird in the hand” is what drives debt settlement. None of this has changed in the past 28 years.

However, the basic principle that banks or creditors want to reduce losses or recover against them does NOT mean they tend to make it easy on people to settle. That is where a professional service like ZipDebt.com and my superior Tailored Debt Settlement method comes into play. When your day to day business is negotiating settlements, it’s possible to see the landscape from a higher altitude, and thereby take most of the guesswork and uncertainty out of the process.

Debt Settlement in 2025 and Beyond: Cash Loans & Lawsuit Risk

What’s new in 2025? Two major factors are very different now in the debt settlement space, and consumers need to be aware of these developments:

1. CASH LOANS: Large balance personal loans reaching charge-off faster and potentially blowing up an old fashioned approach to debt settlement planning.

2. LAWSUIT RISK: The risk of being sued is far higher now, with all the major creditors being more aggressive and using collection litigation to recover.

Let’s discuss these two key factors in a little more detail.

First, it used to be that ALL of the debt included in settlement programs was credit card debt issued by the top credit grantors (Chase, Citibank, Bank of America, Wells Fargo, U.S. Bank, Discover, etc.). It was very rare to see a personal loan included in the mix. But since the Great Recession of 2008-2010, a different class of creditor stepped up to fill the lending gaps that opened up when the banks started getting more careful about granting credit. We are talking about lenders like SoFi, Upstart, Upgrade, Best Egg, Lending Club, Prosper, and others. The balances tend to be higher on these loans, $15,000 up to $100,000, compared to typical credit card balances in the range of $5,000 to $15,000.

One important thing to understand is that personal loans will reach the charge-off deadline after only FOUR MONTHS of delinquency, compared to six months for credit card debt balances. The shorter timeline to writing off the debt means things move faster on personal loans, with risk mounting much more quickly. Larger balances also justify the expense of pursuing recovery more aggressively. And nowadays it is very common to see a lender sell the account right after charge-off to a debt purchaser. These debt buyers routinely use litigation to force consumers to resume payments on a debt.

No Sugar Coating: Getting Sued is a Genuine Risk

Creditors in general are getting AGGRESSIVE again, with most of the major banks moving to collection litigation far earlier in the delinquency process than in previous years. It used to be that out of a dozen or so major credit card banks, perhaps ONE of them was being aggressive at a time, so it was easier to help people manage the risk they were facing. The others would eventually get around to escalating, but not for many months, sometimes a year or more. Not anymore! Now they are almost all being aggressive.

Without CAREFUL RISK MANAGEMENT layered into the process, unsuspecting consumers are going to find out the hard way that traditional debt settlement programs will be less and less helpful at managing unworkable debt loads.

The bottom line is that debt settlement remains a viable solution in 2025 for avoiding Chapter 13 bankruptcy, but thorough ANALYSIS and PLANNING are required up front. This is simply not possible using the cookie cutter one-size-fits-all approach employed by the larger debt settlement firms. My goal here at ZipDebt.com is to provide unfiltered advice based on what is happening in the real world of debt settlement in 2025. If I don’t believe you are a good fit for this approach, I will tell you that point blank rather than try to “sign you up” to my program.

If you are struggling with out-of-control debt, please feel free to EMAIL ME AT [email protected] with some information on your situation. Tell me how much debt you have and what banks or lenders you owe it to. We’ll review your situation together to figure out whether or not debt settlement makes sense for your financial scenario.

ZipDebt Debt Relief — MAJOR ANNOUNCEMENT FOR 2020 and COVID-19: Full Service TAILORED DEBT SETTLEMENT Available for Select Clients, Do-It-Yourself Coaching & Services No Longer Offered

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ZipDebt is no longer offering do-it-yourself debt relief coaching or the audio seminar launched in 2004 to help consumers with negotiating settlements on their credit card debts.

Full Service Debt Settlement is available via my Tailored Debt Settlement Program for selected clients only. Please note that an application is required and I do not accept everyone who applies into my program due to limited capacity.

My name is Charles J. Phelan, and zipdebt.com is my longtime website portal, active since 2004. I go back to 1997 as one of the very first professional debt negotiators assisting consumers to settle their unsecured credit card and personal debts. In 2000, I helped to build one of the nation’s first large scale debt settlement companies, but I didn’t like the greed-oriented trend on fee gouging within the debt relief industry, so in 2004 I set up zipdebt.com to provide low cost services.

Since launching ZipDebt in 2004, I’ve personally helped many thousands of consumers to deal with their creditors one-on-one, and I’ve collected numerous testimonials from satisfied clients.

For many years, I only offered DIY-with-coaching services, but in 2016 I finally went back to providing full service negotiation support via my proprietary method, which I call Tailored Debt Settlement.

As of May 1st, 2020, I will no longer be offering paid consultations, the audio seminar, coaching support for do-it-yourself debt settlement, document review services, or free 20-minute consultations. My rationale for making this major change in my business model has to do with several key factors.

  • After 23 years in the debt relief space, and at the age of 62, it’s been a long and difficult grind to offer these services year after year, all by myself, with virtually no support staff for the coaching process. I want to work a little less intensely than I have been for the past two decades, and honestly I would rather be out hiking the forest trails in the beautiful San Jacinto Mountains where I live!
  • Compared to when I was literally the Lone Ranger of DIY Debt Settlement, today there is a ton of free information online to help consumers who wish to settle their debts without professional assistance, and over time it’s been difficult to sustain the original business model that ZipDebt was built around.
  • Further, in recent years the process of negotiating settlements has become more technical and involved, especially with respect to the need for precision timing of the entry points for negotiation. Consumers on their own can still be successful at the DIY approach, but it’s trickier to manage legal risk than it was in the “good old days,” and with several aggressive debt buyers operating now in this space, it’s even more of a challenge than before.
  • After the Great Recession of 2008, I was flooded with an astonishing amount of new inquiries and the demand for DIY debt relief coaching went through the roof. I was working 12-14 hour days trying to keep up with all the activity. As a consequence of the COVID-19 pandemic crisis, I’m quite certain that later in 2020 or early 2021 a new tidal wave of activity will occur, by consumers seeking help with their debts.

Based on all the above factors, I’ve decided that now is the time for me to pare back my service offerings, and focus on a select group of clients that have high odds of being successful implementing the debt settlement approach. I’m still here, and I’ll still be helping as much as possible, but I will be taking on fewer clients under this revised business model than I had been previously.

If you want professional help from a provider that cares just as much about helping you manage your risk as saving you money (or earning fees!), please read my 5-page series on Tailored Debt Settlement. If you like what you read there, then email me your application, which must include a list of the debts you’re looking to settle, some background explanation on your financial situation, and a forecast on your available funding for settlement negotiations.

Many thanks to the thousands of Americans who have trusted me to help with their debt situations over these past 23+ years. I look forward to doing my small part to help our country get past this crisis and move forward again. Stay safe out there, and best wishes to all.

Making the Tough Financial Decision, Part 3 — Paying Off $63,000 Credit Card Debt & Lessons Learned

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In Parts I & II of this series, I explained how a seasoned financial consultant like myself managed to get into credit card debt, and how I made the difficult decision to sell our dream home to resolve that growing financial crisis. In this final part, I’ll finish the story and then discuss some of the lessons learned along the way.

When you’re in the rapids and headed for a waterfall like I was, it’s time to steer for shore and get out of the water. That’s what I did by liquidating the equity in my property. And while it was incredibly difficult to get over my psychological resistance to selling that home, in hindsight it was a smart financial move. I sold into a steadily rising market at a healthy net profit, sufficient to pay off the credit card debt and still leave working capital and some emergency cash reserves.

As I noted earlier, I had been using credit cards as a shock absorber to support my sagging budget, and I did this in order to conserve liquid cash. During the period when I was building unsecured debt, I never had to dip into my long-term retirement accounts, because I never spent down all of my non-retirement cash.

I kept my eye on the ball and never let the situation get out of hand. I made sure I had sufficient reserves to implement my own debt settlement program if I had to. I certainly did cut it close, however.

For the year or so prior to making the decision to sell our home, the juggling act grew to absurd proportions. I was carrying balances on 17 different credit cards, structured in a way to minimize interest expenses. This doesn’t count regular bills like the mortgage, utilities, cable, telephone, car, home and auto maintenance, or medical expenses.

Needless to say, it was intensely stressful to keep so many plates spinning in the air at the same time. I had to keep spreadsheets so I would never miss a minimum payment. I couldn’t skip a beat or the whole row of plates would come crashing down.

One concern I had at the back of my mind was timing. Making a decision to sell a home you truly love is difficult enough. But then you have to implement the decision at the right time. I acted when I knew market prices in my neighborhood were rising at a faster clip than surrounding zip codes. So I can’t deny a bit of luck being on my side. Then again, I had only gone forward with buying this home back in 2010 after I had assured myself it would be a rock solid financial investment. They say that “fortune favors the bold,” but I believe fortune also favors those who are prepared for it and have done their homework.

Timing was relevant in other ways too. I checked my credit score every 3-6 months, to see whether my increasing use of credit was bringing down my score. I was well over 800 FICO when I bought the house. Sure enough, I watched the score come down as my credit utilization went up. Over time, my score dropped below 800, into the 770s, then 760s, then 750s. All this with never having missed a single payment.

What worried me was triggering a credit utilization threshold that would prompt my creditors to reevaluate my tradelines with them. Once that process kicks in, slow motion disaster is the usual outcome. One creditor lowers your open credit to limit their risk, which makes your usage ratio even worse, taking another notch off your score. Other creditors follow along, and soon you are maxed-out where before you had open credit. Game over.

That didn’t happen to me, but I got perilously close. I know because I finally got a glimpse of my true FICO score. I mean the score that creditors actually see, not the puffed up one they sell you at the bureaus. It was buried in a disclosure from a major creditor who turned me down for a $10,000 line of credit and offered me a $4,000 limit instead.

The disclosure letter gave my score as 722. (The most common figure cited for a “prime” credit rating is 720. If you’re over that bar, lenders will trip over themselves to get your business. Below that, not so much!) That’s how close I got to seeing my generous credit limits lowered on my existing accounts, two points from the edge.

By the time we finished preparing the house for sale in mid-2014, our credit card debt had grown to $63,000. After closing escrow and paying off those accounts one by one, I waited about a month and then ran my credit again. The score Experian gave me was above 800 again, where I had been in the 750s and dropping. I don’t know where my true score stands today, but I don’t care because I won’t be applying for any financing in the near future.

Let me tell you: It feels amazing to go from owing almost $500k on a mortgage, plus $63k of credit card debt, to having no mortgage and no credit card debt less than one month later. I had gotten so used to carrying credit card balances, it actually felt strange to not have those bills anymore. Yet given what I do for a living, I was annoyed at having to carry any credit card debt in the first place, so I considered it my professional duty to extricate myself from that situation and then write about it. Hence this article series.

I wrote about my analysis above, the Ben Franklin approach, the three-year rule, and how I concluded that selling the house was the right decision. I also want to make clear how I evaluated the various debt relief options available to me.

Debt roll-up didn’t make much sense for my situation. I didn’t have reliable income figures from month to month, so planning for overpaying the minimums consistently enough to do a roll-up strategy was not realistic.

Bankruptcy was off the table for me, but not for any emotional reasons. I had too much equity in my property to file Chapter 7 without a forced liquidation anyway, and I would have negotiated settlements long before considering a 5-year Chapter 13 bankruptcy.

You may be wondering. Why didn’t I just quit paying my credit cards and settle my debts later? This is an important question, especially for me. I’ve been teaching people how to settle their debts for 18 years, settlement works like magic when the situation warrants that approach.

The bottom line is you should only do debt settlement if you have to. I knew if I sold the property at the right price, I’d have enough to simply pay off my debts in full. That was the ethical thing to do and the correct business decision as well. There is a time when letting go of your credit score is the right thing to do. But in my case, I wanted to keep my financing options open for business reasons. When I looked at all the factors, it made the most sense to free up the cash that was locked up in the property, pay off the debts, get ship-shape again, and then focus on doing what I do best — providing life-changing information to struggling Americans trying to make ends meet.

So where did we land after selling our dream home? I’ve always loved the mountains of Southern California, and did my share of day hiking in the San Gabriels and Cuyamaca Mountains. One of the things I loved the most about our “dream home” was its amazing view of the mountains. I figured if I actually went to live in the mountains instead of just looking at them, then I’d be happy about the move instead of depressed at having to leave such a nice home. So we moved to the small mountain town of Idyllwild, nestled about a mile high in the San Jacinto Mountains.

With the help of yet another crackerjack realtor, we secured a nice home under a long-term lease agreement. We wanted to “try before we buy” in this small mountain community, so a lease made perfect sense for our situation. Home ownership can indeed be a wonderful thing, provided the financial winds are in your favor. But it can also be a huge burden when the numbers are working against you. So we were looking for a breather, a time without a mortgage or the responsibility of home ownership.

After getting past the move itself, I had expected to feel something of a letdown. I figured I’d feel a sense of loss at having to give up the house. Instead, I felt liberated. The mortgage debt was paid off and the credit card debt was GONE! I had 17 fewer bills each month to worry about. No more worrying about covering the next property tax installment. And I had found a nice place to live in the mountains where I had always wanted to be. Not so bad.

Through this process I’ve gained invaluable experience about making tough financial decisions, and I felt a need to share that story with my readers. As a debt coach who regularly encourages clients to make such decisions, I had to step up and take the exact same advice I’d have given a client facing my situation.

But … this is not just about selling a dream home!

There are many types of tough decisions you might have to face in your financial future. The decision to file bankruptcy is a difficult one for most people. I often see clients who have ruled out bankruptcy purely for emotional reasons, rather than sound financial arithmetic. If your “tough decision” means filing Chapter 7 bankruptcy to solve your problem, then so be it! Life will go on. Millions of people have survived bankruptcy and have done just fine afterwards, and you will too.

If you can’t do Chapter 7 bankruptcy and would have to file under Chapter 13, then you’d be facing a totally different decision. Chapter 7 wipes out unsecured debt and provides a fresh start within months, with the only cost outlay being the case fees (usually in the range of $1,500 to $2,500). Chapter 13, on the other hand, requires a repayment over 3 to 5 years, at a monthly figure determined by the court. Facing the prospect of being in a long-term bankruptcy case, one should consider debt settlement as an alternative. Again, a tough decision all the way around, but one that must be made with almost Spock-like detachment!

To take a different example, perhaps the problem is the recreational vehicle sitting out in your side yard, little used but a sentimental favorite. You’ve had some good weekends on the road and camping in your RV, and you hate to give it up. But the payments are $740/month and you are coming up short by more than that every month after getting hit with a pay cut at work. What to do? How about a voluntary turn-in, so they don’t have to repossess the vehicle or sue you to recover it? That’s a tough decision for sure, but emotion has no place in that decision. Let the numbers dictate the solution, and the answer becomes obvious.

I could go on describing various hypothetical scenarios for tough financial decisions, but I trust that the above is enough to give readers an appreciation for the approach I’ve been arguing for throughout this series.

A few final thoughts on lessons learned:

1. Nothing lasts forever, including income sources. Give some consideration to how you would handle a gap in income of 3 months, 6 months, and 12 months.

2. Home ownership is not always better than renting. It may or may not be better, depending on your financial situation. Run your figures to see what your home is actually costing you year-over-year, then compare to renting.

3. Life is about a lot more than income and net worth, whether or not you own a home, etc. Apply the three-year rule and see how you feel about a particular decision.

4. Evaluate your financial affairs from the perspective that your assets should be working for you (that is, to generate income and support), rather than you always working to support your assets.

5. All problems are relative. There are young soldiers back from Iraq and Afghanistan who are missing two, three, even all four limbs. They are learning to do kayaking and skiing and other sports using prosthetic limbs. Compared to those brave young men and women, I have no problems I care to complain about, financial or otherwise. How about you?

6. Do your research. There are no magic bullets, but there certainly are a lot of scams in the debt relief world.

I’ll close with a personal note. Before publication, I shared this article with a good friend, and he expressed some concern I might be revealing too much about my personal financial status. “People want their debt coaches to be financially stable,” he reminded me.

I thought about it, and concluded this was precisely the point of the article. I had applied my own methods and made the adjustments dictated by my own financial self-analysis. The result was a return to long-term stability and a lot less day-to-day stress.

In the end, it comes down to honesty. When you are facing a tough financial decision, the path to a solution begins with an honest look at your situation. You have to face reality, and that is simply not possible until you strip away all forms of emotional pretense and denial.

In this article I’ve tried to use myself as an example, to show how I got in trouble when I ignored this principle of objectivity, and how I was able to turn things around when I finally faced facts and took my own advice. I hope the example was of value to you if you needed a nudge in the right direction. To those seeking reliable debt relief information, please refer to my website at zipdebt.com for resources, ideas, and program information.

Making the Tough Financial Decision, Part 2 — Our Dream Home Goes on the Market

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I have an important rule for making financial decisions:

Set your emotions aside and let the numbers do the talking.

It’s a rule I emphasize over and over with my coaching clients. Emotions and financial math do not mix. They are mutually exclusive domains. You need to bundle up all your feelings, anxiety, attachments, desires and fears, and mentally stuff them into a suitcase outside the door of your office. Then analyze the situation mathematically.

Numbers don’t lie. Two plus two will always equal four, and five minus eight will always equal negative three. Numbers don’t care how you feel about them and neither do dollar bills. If you are emotionally attached to an unsustainable situation and you do not accept that reality, you will be blind to opportunities and solutions for solving the problem.

As I mentioned in Part I above, I was in the rapids and headed for financial doom. What do you do when there’s a deadly waterfall ahead? Get out of the water, of course!

In my case, getting out of the water meant cashing in the equity in my property. Yet I could not bring myself to think in terms of selling my dream home. My pride and ego were in the way, big time. I had made the exact same mistake I warn my clients against. Talk about being the plumber with the leaky faucet at home! I allowed emotions and sentiment to cloud my business judgment.

After running losses for two consecutive years, I became “house poor” by 2013, yet I still failed to take action. In fact, I didn’t actually make the decision to sell our home until April 2014, a year longer than I should have waited. That’s because my emotions kept getting in the way. My stubborn refusal to consider selling this property was rooted in pride. And when I looked deeper, I realized that it was also insecurity about the future.

Where do you go after selling your dream home? How would I ever replace the unique privacy and serenity offered by this particular residence? How could I ever duplicate that feeling of expansive joy at the incredible views of the mountains? I got depressed even thinking about it. Had I worked this hard all these years, scrimping, saving and sacrificing to buy a nice home, only to have to sell it so quickly?

I let my emotions get the better of me. I delayed the decision and continued to wait for things to turn around. Well, they didn’t.

The essential problem for my business is that the rate of defaulted debt was three or four times higher at the peak than it is today. The banks wrote off hundreds of billions of dollars in those years, and then battened down the hatches. Lending standards became much tighter and default rates declined, reaching 15-year lows.

When there are 75% fewer people needing help with their credit card debts, it stands to reason that income tied to this pool of debt will decline by a similar measure.

Of course, it’s easy to do this analysis looking through the rear view mirror. At the time, no one predicted such a precipitous decline in charge-off accounts. It was a unique time in financial history. Who knew what the future might bring?

Meanwhile, back at our dream house, I had been keeping my eye on real estate values. After purchasing the property for $654,000, market conditions continued to worsen at first, and on the public valuation websites, our home was valued as low as $598,000 at one point.

It wasn’t long, however, before prices started to turn up once more. Even though I knew it was an artificial price, I was elated when I checked the values one day and saw that our home was “in the money” again. After that, it wasn’t long before properties in our neighborhood started selling for prices above $700,000.

Before I go on, I want to underscore an important point. It’s true that I was building a ton of credit card debt, but I did this while I had a positive net worth position.

It’s one thing to owe more than $60,000 of credit card debt when you have no income and your house is upside down. You should talk to a bankruptcy attorney in that case! It’s another matter to owe $60k when you do still have some income (even though not enough), and you have more than six figures of equity in your home.

My credit card debt was underpinned by a non-liquid asset in the form of real estate.

I also still had some reserve cash in the bank against emergencies, although I constantly raided that reserve to pay bills, until it became a shadow of its former self.

By the time 2014 rolled around, I had already endured three consecutive down years in the business cycle, and the coming year wasn’t looking any better. In the rapids, waterfall not so far ahead. How to steer to shore?

There seemed no alternative. I had to start thinking about selling the house. I did what I advise clients to do when they are wrestling with a tough financial decision. I checked my emotions outside the door and did the math dispassionately.

Fortunately, real estate prices in Southern California had continued to increase at a healthy pace. I made some reasonable assumptions about the selling price and transaction costs to arrive at a likely net amount after paying off the mortgage.

The numbers talked to me, and the answer stared me in the face. If I could get a decent market price for my property, I’d turn a nice profit and walk away with enough cash to pay off our mounting credit card debt and still leave enough to have working capital again, capital I needed for business development and renewed marketing efforts.

Then my heart sank when I thought about what it would take to arrive at that outcome. And that was only one side of the equation. I also had to consider what the next act would be for our family. Where would we move to? Where would we be comfortable after this?

I like to think outside the box, to be as creative as possible when thinking things through. So I decided to let myself go and get as radical as possible. Perhaps I should just cash out the house and retire to an RV lifestyle!

My wife and I seriously discussed this for a while, even to the point of going to a RV show to view a few of the models. I must say, some of them seem great! But we weren’t quite ready to shoehorn ourselves from a large ranch home into a small “rolling motel room.” Not yet anyway.

No question about it though. Making the decision to sell our beautiful dream home was one of the toughest financial calls I’ve ever had to make. But I kept focusing on the relentless mathematical reality of my situation, and I let the numbers lead me to the solution.

I also went back to the very basics, the old Ben Franklin analysis. You know the drill. Take a piece of paper and draw a line down the middle. On one side list all the reasons in favor of taking some action or making a decision. On the other side list all the reasons against. Then compare the two lists. The answer is usually obvious.

In my case most of the reasons in favor of trying to keep the property fell under the category of emotion or sentiment, while most of the reasons in the “sell” column were grounded in solid financial reasoning. The Ben Franklin analysis was a no-brainer. Ben said, “Time to sell the house.”

Another technique I applied was the three-year rule. Unless you are faint of heart, this is a very useful thought exercise. Pretend you will be dead three years from now. It doesn’t matter the reason. You’ve been granted knowledge of your expiration date and in three years your time is up.

Now think about this important decision you’re wrestling over, whatever it may be. Does it matter that you hang on in order to have things your way, and stress out for the next three years, which is all the time you have left? Would you still make the same decision either way?

Or would you sit down and write out a bucket list, all the things you’ve wanted to do in life but never did. Maybe you never found the time. Perhaps you were just too busy. But now time is of the essence. Would that list include striving to maintain the exact same situation you are currently in? Even if that means stress and worry until the end of your life?

Changes the viewpoint a bit, no?

We are all taught that home ownership is part of the American dream and that it’s a smart investment. But it’s difficult to account for factors that aren’t financial. I’m talking about stress, as well as the demands on time and resources involved in maintaining a property.

If you think about it, working to maintain an expensive home is a decision to work for your assets, instead of putting your assets to work for you.

I applied all these filters to my situation and the only logical conclusion was to sell the house. I wrestled with this, let the emotions out of the bag, dealt with them, and pulled the trigger. That is, I met with a realtor.

Now, when you decide to sell a house, make sure you choose the right real estate broker! I’m a big fan of the do-it-yourself approach when it comes to settling credit card debts, but selling a house is another story entirely. Just getting the place ready and waiting for a good offer was stressful enough. There’s no way I was going to add the burden of marketing and promoting the place, showing it myself, and so on. There is also legal liability involved, and the paperwork is onerous, at least here in California.

Choosing the right price for our property proved to be an interesting exercise, one that required all my experience as a negotiator. I set the price high, not “crazy” high, but high enough to send a message to the neighborhood and to the realtor community. I chose $799,000 as my listing price. This figure was well over what any comparable homes in our development had sold for in the past year or more, but still under the psychological $800k barrier.

I decided to set the price a little high simply because market conditions warranted it. We were in a mode of rising prices generally. Plus my location was a fairly hot area, where home prices for nice mini-estates were still within reach of retirees.

Emotions did come into it in this sense. We had fallen in love with the place four years earlier, and we knew in our hearts that someone else would come along and fall in love with the place too. That instinct turned out to be exactly correct.

At first we found resistance to our price point. At a broker’s walkthrough of our property, the opinions were nearly unanimous. Nice view, but without all the latest upgrades it’s priced too high at $799,000. One chap suggested it should be lowered to $769,000. I’m glad I didn’t choose him for my real estate agent! “That was last year’s price,” my realtor told him. (I like my realtor a lot.)

I stuck to my guns and went with the $799,000 listing price, and our broker supported that decision. Three weeks later we had an offer, under our asking price but still reasonable. After a few rounds of negotiating, we arrived at a package of selling price and closing adjustments that netted to $790,000.

That figure was fine with us, a very fair price for a home with a “million dollar view.” We actually did believe it would be worth a million someday soon, but couldn’t afford to hang on long enough to find out. So we passed the property on to a lovely retired couple who had fallen in love with the place just like we did.

Escrow was a stressful process, to say the least, and ours ran to almost three months duration. But close it did, and the property changed hands in November 2014, just a little over four years from our original purchase date.

The attentive reader may have noticed I’ve said little about the other side of the equation. Selling a home involves moving and relocating elsewhere. Where do you go after selling your dream home that won’t feel like a step down?

… continue to Part 3

Making the Tough Financial Decision — Our Dream Home Goes On the Market

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How A Seasoned Debt Coach Took His Own Advice and Paid Off $63,000 Credit Card Debt

by Charles J. Phelan

This is the story of how a financial coach with a deep reservoir of hands-on experience still managed to get himself into $63,000 of credit card debt, and then solved the problem by making the same kind of tough decision he would recommend to a client.

In this first of a 3-part series, I’ll explain how I got into a financial bind despite years of experience. In the second installment, I’ll discuss how I went about solving the problem. And in the third and final article in the series, I’ll let you know how it all worked out, talk about making tough financial decisions, and hopefully get you thinking positively about your own situation.

*****

Part I, Heading Over A Financial Waterfall

We had just moved into our dream home, a 2,500 square foot single story beauty of a ranch home, with privacy and an incredible panoramic view. It was our little slice of paradise, purchased in late 2010, the best house I had ever had the privilege of living in. No other property we’d ever rented or owned came close to its upscale quality and unique charm. I figured this was it, our forever place.

“Coffin, or urn,” I told my wife. “You can pick either one, but the only way I’m moving out of this house is feet first.”

“Famous last words,” she replied.

“No, seriously. I’m never going to move again, period, end of story.”

“Never say never,” came her savvy response.

She was right. I was wrong. As I write this four years later (January 2015) I no longer own that house. In order to solve a deepening financial crisis that developed after we bought the home, I made one of the toughest decisions of my life and put our dream home on the market less than four years after buying it.

How did I get into financial trouble? The short version is I bought an expensive home just as my business income was about to drop off a cliff. Why did I take the plunge and buy a house in 2010 when the real estate crisis was still going strong? For starters, we were beyond tired with the rental home we had been living in since 2001. We had been working hard all our lives, and figured in our 50s it was time to acquire a nice home for the long term.

I had owned other properties and sold them well before the meltdown that started in 2007, and then went for years without being a homeowner. When the worst of the market crash seemed to be behind us, and our income had been healthy and stable for more than three years, I took a closer look and saw it was a buyer’s market. I felt the time had come.

I’m a self-employed debt consultant, with a unique niche in coaching consumers and small business owners how to settle their debts without paying big fees to get the job done. Business was very good during the peak years of the Great Recession, and it seemed like there was no end in sight to the tidal wave of distressed consumers seeking assistance with their debt problems.

While business was good, I put my nose to the grindstone, worked 12-14 hour days without vacations, and helped thousands of people. I stayed completely free of debt myself, remained frugal and built savings. Based on my financial situation in early-2010, I was approved for a home purchase up to $850,000, with 20% down payment.

I had the cash for a down payment, but didn’t want to overextend on the monthly mortgage and taxes. So I pulled back and focused on properties under $700,000. Let me be clear that I didn’t lust for a mansion or anything extravagant. In the San Diego coastal area, condominiums can sell for upwards of $800-900k. But to be conservative, we forewent the pool and golf course or beach location, and shifted away from the more expensive coastal area to inland regions where values were better.

We found an amazing home in Escondido, and after some negotiating ended up with a fair price of $654k, around $200k below the level I’d been approved for. Since the mortgage payment wasn’t much higher than the rent I had already been paying, I felt I was being prudent in this decision, and went ahead with the transaction. By the end of October 2010 we had closed escrow and were over the moon with happiness as we settled into our new home.

Our total household credit card debt at the end of 2010 stood at zero, and we had also paid off both vehicles long before. Our only debt was the house, $523,000 to Wells Fargo on a 30 year fixed conventional mortgage at 4.375%, payment at $2,612.26 per month (principal and interest).

Now, here’s where I have to get a bit more personal. If I just leave you with the raw financial data, it won’t present the whole picture. It won’t include the emotions that influenced my decisions along the way. To get the financial gist across, I omitted some truly important factors. I left out that we were buying this home during a time when my wife was seriously ill with surgery pending.

To make matters worse, since applying for financing earlier in 2010, my revenue numbers had been steadily dropping month after month. This added enormous pressure to move quickly before losing qualification. There were also numerous other personal and family crises contributing to our stress levels.

The pressure got so intense, my body reacted violently. I was unable to keep any food down for three straight days after I wrote the deposit check to open escrow. A week or so later, a blood vessel popped in my left ear, and the hearing in that ear turned to mush. I nearly incurred permanent hearing loss, but for a quick diagnosis and treatment by a good doctor.

These were psychological and medical warning signs I was in over my head. But I come from a tough New England clan, so I did what we do. I sucked it up and bulled my way through these challenges and “got it done.” We bought the house, moved in, and that was it for me. Never moving again, you see. Coffin or urn!

The truth was, I had a good sense of financial security before buying the house and promptly lost it the day I wrote that first check.

Nothing lasts forever, especially business income in the age of the Internet. It would take a separate series to explain all the ups and downs of the debt settlement field I’ve worked in since 1997. It’s a volatile industry, but during the peak years of the financial crisis there was a long period of increasing demand for services. After several consecutive years of posting great numbers, it was easy to get lulled into a false sense of security. Even us “pros” can make this mistake.

It’s hard to see a bubble when you’re inside it. This was true of the real estate bubble, and it’s also true for individual industries when they hit a boom period. Conditions were good for a long time in the debt relief world, long enough that I overlooked the old adage that past performance is no guarantee of future results. I made the false assumption those conditions would continue for the foreseeable future, and I was quickly proven wrong.

The entire debt relief industry hit the skids in late 2010, right when I was buying my dream home, although I certainly didn’t see it clearly enough to know what was happening at the time. There were a series of factors and changes that turned into a perfect storm, resulting in dropping income numbers month after month, and a shift from profit to steady losses.

It can be truly astonishing how swiftly business conditions can change. One moment you’re riding high and can do no wrong, and in the blink of an eye some new technology or company or website has left you in the dust. Just ask Blackberry. Once the reigning king of mobile devices, now a limping distant entrant in the tech wars.

One moment I had a prime link to my website from a highly ranked article page on a major financial news site, in place for years and generating tons of highly qualified traffic. Then, in a flash the article was gone, scrubbed from the financial site and replaced with a newer article that didn’t feature my link. Result? A 30-40% drop in traffic overnight. Trouble.

I won’t get started talking about the Google updates, how they fiddle with the search software to mess with the people trying to game the ranking results — many businesses operating in good faith get creamed in the process and that’s just what happens in shark-infested waters.

One of the assumptions I had made in my analysis was regarding property taxes, not a trivial expense at $7,500 per year. “They’ll pay their own way via tax deduction,” I told myself. Based on prior year taxes, I could use the deduction, and the tax savings would just about offset the taxes. On paper, it looked like a wash, and I congratulated myself on good tax planning.

Out in the real world, business income did not pace that of prior years, not even close, and I wound up losing money instead of turning a profit. As a consequence, I didn’t generate the income needed for the tax savings to pay off as intended. Instead, I had to come up with a way to pay those taxes when funds were tight. Enter the credit card and its tempting features!

Going into the crisis period, I had zero debt and well over $120,000 of open available credit across numerous accounts. I had kept credit lines open for just such an emergency, and carefully added more over time. After seeing negative cash flow month after month with no end in sight, I decided to conserve liquid cash by taking advantage of 0% promotional interest offers.

“Things will pick up yet,” I kept telling myself, always the optimist. But the numbers continued dropping in 2012 while multiple personal tragedies occupied our attention. It seemed like I never had the time to truly enjoy the dream home I had worked so hard to acquire. Nor did I have the income needed to properly maintain the place, let alone invest in the kitchen or bathroom upgrades we had planned. We weren’t even able to furnish the place the way we wanted to.

As time passed, our dream home gradually shifted from feeling like our pride and joy to feeling like a burden. Look into the price of a new roof or a new HVAC system and you’ll get the picture. If something breaks in a rental, you call the landlord. If you’re the landlord, the bill is on you, and some of those bills can be heart-sinking whoppers. You can go without such expenses for a long time, or you might get hit with a disaster tomorrow. The point is that even the best estimates for upkeep on any given property are based on the past, and the future won’t necessarily resemble the past.

By the end of 2011 our total unsecured debt stood at $18,600, virtually all of it added that year. A year later, the total credit card debt had climbed to $38,550. During 2013, I drew down cash to keep from adding further to the debt, but we had still reached $43,000 at year-end 2013.

So that’s $43,000 of debt added in just three years, with more on the way …

Please don’t try this at home! When it comes to credit cards, I know what I’m doing, so I was able to juggle multiple accounts to keep interest expenses as low as possible. I was using the cards as a shock absorber, to conserve cash for emergencies, keep the business going, and pay large one-off expenses like property taxes.

There are times in life when taking on debt is unavoidable. When it happens there should be no fear involved. But there are also times when it’s necessary to recognize financial reality and make the tough call.

Picture yourself in a canoe on the white waters of a fast river, being buffeted around violently and careening toward a waterfall that’s just around the bend. What do you do? That is the question I asked myself as 2013 turned the corner on 2014 and I could no longer deny I was in deep trouble.

… continue to Part 2

Mortgage Forgiveness Debt Relief Act Extended Retroactively for 2014 — Great News for Consumers Who Had Primary Home Mortgage Debt Canceled Last Year!

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In 2007, Congress pass the Mortgage Forgiveness Debt Relief Act (MFDRA) and initially set it to expire at the end of 2012. This temporary change to the IRS tax code permitted an exclusion for cancelation of debt income associated with forgiven mortgage debt. The Act was later extended for the 2013 tax year, but then expired again on December 31, 2013.

The MFDRA has been hugely beneficial for consumers who lost homes to foreclosure or short sale. Let’s say you did a short sale and the lender forgave $100,000 of mortgage debt as part of the agreement. Without the Act in force, that $100,000 of forgiven mortgage debt would be treated by the IRS as taxable income! We’re not talking about a capital gain taxed at 15%, but rather ordinary income taxed at 25% to 35% or more, depending on your specific tax situation. Hello, unexpected tax bill for $25,000 to 35,000 or more!

It’s true that another exemption exists for those who were insolvent just before the cancelation of debt. But for the person with retirement accounts or other assets that exceed total liabilities prior to the cancelation, the insolvency exclusion is not available.

Throughout calendar-year 2014, tax professionals and realtors specializing in short sales have been deeply worried that Congress would not extend the Act again, leaving many Americans with a stiff tax bill they hadn’t planned for. But fortunately, the Mortgage Forgiveness Debt Relief Act has officially been extended again for 2014. This retroactive extension was signed into law by President Obama on December 19, 2014 (better late than never!), as part of the late session spending bill approved by both the House and Senate.

This is great news for people who had primary home mortgage debt canceled during 2014. If the MFDRA had not been extended, hundreds of thousands of Americans who lost their homes or sold short last year would have had to pay massive tax bills on income they never actually received.

What will happen for the coming 2015 tax year remains to be seen, although there is no question the right thing for Congress to do is extend the MFDRA again for mortgage debt canceled during 2015. There are still too many homes underwater, too many houses in the foreclosure pipeline for this exclusion to be allowed to expire again.

It’s important to understand that the relief provision is limited to “qualified principal residence indebtedness,” which is defined as any mortgage you took out to “buy, build, or substantially improve your main home.” Income, rental, or other commercial property does not qualify.

If you had a cancelation of qualified principal residence debt in 2014, it is not necessary to calculate solvency vs. insolvency. The Act permits an exclusion of taxable income up to $2 million of forgiven qualifying debt, without respect to the financial position of the debtor.

You may also face a situation where only part of the forgiven debt is qualified principal residence indebtedness. In this case, the difference can still be excluded if you would otherwise be able to claim insolvency. For example, many home equity lines of credit (HELOCs) do not qualify as principal residence indebtedness because they were not used to buy, build, or improve the property.

Let’s say you sold short a property where $100,000 of qualified first mortgage debt was forgiven, and a $50,000 HELOC (used to pay off credit card debt) was also wiped out and canceled. You can claim the exemption for principal residence indebtedness only for the $100,000 first mortgage. The HELOC does not qualify for this exclusion because the $50,000 of cash was not used to buy the home or finance home improvements.

You can, however, still claim the insolvency exemption for that $50,000 of forgiven HELOC debt, provided you were insolvent by more than $50,000 just before the cancelation.

Regardless of whether you are claiming insolvency or just the relief granted under the MFDRA, you must still submit Form 982 with your Federal Form 1040.

To assist those who are struggling with the official IRS Instructions for the “tax form from hell” (i.e., IRS Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness”), zipdebt.com offers the Form 982 Calculator for only $29. This easy-to-use calculator will save you countless frustrating hours filling out this notoriously difficult tax form.