This article will describe the success story experienced by one of my clients, who used my training and coaching program to settle their own debts. The client handled all the negotiations himself, and therefore did not pay any fees to a settlement company. It’s a great example of the power of debt settlement to rapidly turn around a desperate financial situation. The facts and figures are all real, as documented by the client himself. However, to protect his privacy, I’ve changed his name to Bill and his wife’s name to Susan. I’m also going to exclude the names of the banks involved.
I have two reasons for doing this. First, the percentages that various banks will settle for changes frequently. Settlement is a moving target, and I don’t want people to assume they’ll get the exact same deal with these banks. Second, the power in this example lies in the end result, as represented by the average settlement percentage of 40% net, and this is a reasonable approximation of what most debt settlement clients can expect anyway.
One of my purposes in posting this rather lengthy article is to document the power of debt settlement as it stacks up against a Chapter 13 bankruptcy scenario. The differences will become quite clear as the example unfolds below. I’ll start with a quote from real-life client “Bill” — who sent me the following email in July 2007:
“We did it!!! We settled the last account yesterday. Please see the attached excel spread sheet with the overall net percentages (less than 40%) … Thanks again for your help through this. It is hard to believe we accomplished this in what I consider a relatively short time period. We invested in your coaching program in June of 06, and settled our 6 cards (approximately $100K of debt) in a one year period. We also managed to salvage our credit during this time with no judgments or bankruptcy. We are so happy to have this past us so we can move on to a debt free life.”
Since the spreadsheet Bill sent me was very detailed, it laid the groundwork for a very detailed analysis of his case history. Let’s start with the situation as it existed back in June of 2006 before he got started. There were 6 credit card accounts, with balances and interest rates as follows:
Card A $17,937 25.49%
Card B $17,786 18.49%
Card C $14,415 7.99%
Card D $13,997 14.20%
Card E $13,089 18.49%
Card F $ 5,802 0.00%
Total starting debt = $83,026
Bill and his wife Susan were struggling to keep up with total monthly minimum payments of $2,025, and seeing virtually no progress in reducing the total balances. In Bill’s own words, here is what led them to this situation:
“My wife and I were suffering from the classic case of a start-up business going bad. We tried to make things work, but were not successful in doing so. This lesson learned left us with a huge debt problem. We so desperately wanted to make things work. We went weeks without pay. We ate through all of our savings. We then turned to our credit cards to survive. After all we had outstanding credit. It would be just what we needed to get back on track until we could get things going again. Then it did not get any better. We were still not taking in the pay we needed to survive, let alone making payments on the huge debt we had compiled on our credit cards. I started to do research on filing bankruptcy. In doing so I also decided to look for other alternatives. This is when I discovered your site. I ordered your CD kit, and listened to the entire course. It all made total sense. We followed your model, and one year later we had settled on all six of our cards. The 6 accounts totaled more than $83,000 in debt to start.”
Let’s consider what Bill and Susan would have faced had they tried to pay off this amount of debt via minimum payments. Depending on what happened in the future to the interest rates, they would have had to shell out at least $250,000 over the next 10 years, and if there was ANY trouble at all along the way, with even a SINGLE missed payment, that figure would have jumped to $350,000 to $400,000 over a much longer period, possibly as long as 20 years. We’re talking about $2,000 per month for a 10-20 year period of time. That same future flow of payments invested into a good mutual fund could grow to more than a $500,000 nest egg for retirement! So the “opportunity cost” of carrying more than $80,000 of debt was enormous — basically it represented the difference a comfortable retirement down the road versus retirement on a limited fixed income tied to Social Security.
Due to the change in the bankruptcy rules in 2005, Bill and Susan would have had to file under Chapter 13, which involves a payment schedule for 60 months (5 years). We don’t know the precise payment level that would have resulted, since they never went ahead with a formal bankruptcy, but based on a rough estimate of their income and expenses, the Chapter 13 payment would have been a minimum of $1,000 per month, and possibly as much as $1,500. So had they pursued Chapter 13 as their solution of choice, they would have paid out somewhere between $60,000 and $90,000 over the next five years. Bear in mind that Chapter 13 also includes a lot of restrictions, such as the potential for future pay raises to be absorbed by an increase in the payment to the court trustee. Ditto for tax refunds as well as any new sources of income. At the end of the 5-year struggle to maintain the Chapter 13 plan, they would basically have paid back most or all of the starting debt figures. What would they have to show for their effort? A bankruptcy on the public records section of their credit report!
So Bill and Susan decided to give debt settlement a try instead of putting themselves through the ordeal of a Chapter 13 bankruptcy. Let’s have a look at the results.
Card A started at a balance of $17,937. It inflated to $20,855 by the time they settled it for $6,300. (See my blog post of May 15th for a detailed explanation of this “inflation” factor and why it’s a normal part of the process.)
Card B started at a balance of $17,786. It inflated to $20,548 by the time they settled it for $6,153.
Card C started at a balance of $14,415. It inflated to $17,459 by the time they settled it for $6,111.
Card D started at a balance of $13,997. It inflated to $17,165 by the time they settled it for $14,000.
Card E started at a balance of $13,089. It inflated to $16,008 by the time they settled it for $4,500.
Card F started at a balance of $ 5,802. It inflated to $7,316 by the time they settled it for $2,600.
The overall combined figures are as follows. The starting total of $83,026 in debt inflated to $99,352 by the time everything was settled. Again, my blog post on “debt settlement arithmetic” goes into more detail, but the main point to understand is that during the 12-month period it took them to settle, Bill and his wife took control of the cash flow and banked the $24,000 in payments they would otherwise flushed away on interest.
Adding up the final settlement tally, they paid out a total of $39,664 against $99,352 of debt (based on the balances at time of settlement), which represents an average settlement result of 39.92%. Naturally, Bill and Susan were elated with a savings of around $60,000!
Now, if you paid close attention to the above figures, one account probably jumped out at you. Look at Card D, which ended up with a very high settlement percentage (more than 80%) compared to the other accounts. This leads to a point that I make over and over again when discussing the debt settlement strategy with debt-strapped consumers. Bill had to settle this one account at a high percentage because the creditor had started to initiate a lawsuit. Since he didn’t want to see a judgment, which could have led to wage garnishment or a property lien, Bill chose to put the fire out by accepting a high-percentage settlement.
My point here is that Bill’s debt settlement program was a tremendous success, EVEN THOUGH ONE CREDITOR FILED A LAWSUIT! Even with that one ugly situation included, they still averaged 40% overall, wiped out about $100k in debt for $40k, and finished out the whole process in about 12 months. Compare that to the $60-90k they would have paid out during a 5-year bankruptcy, and you can see that one problematic account did not impede their progress at all.
A logical question to ask is, where did the money come from to do the settlements? Remember, $24,000 of the $40,000 needed to settle came from diverting the existing minimum payment money into a savings account. The remaining $16,000 came from a combination of selling unneeded household items, along with a private loan from a family member. So Bill and Susan were able to wrap up everything in one year. Now they can begin the process of restoring their credit score a full 4 years earlier than they would have been able to under the Chapter 13 scenario.
I hope the above information helps consumers to better understand the power of this option. Debt settlement is not suited for every financial situation. But when it fits the circumstances, debt settlement is a POWERFUL strategy for turning financial desperation into debt-freedom!
this was very informative and their starting situation mirrors our own. Our main concern is our prior
investments. Can they be affected or accessed by creditors during this process? are our investment information
accessible through credit reports, etc?
In response to Tammy’s question, bank accounts and investment accounts
are not ordinarily reported on your credit report, so typically a creditor
has no access to investment account information. Normally, a creditor
would have to file a lawsuit and obtain a judgment in order to gain
access to this type of information. Obviously, you should never allow
matters to escalate to that level!
Bill Taylor says
This is a good indication that after that long disarray of debts, you will find relief. Good Article.