UPDATE July 2020. For consumers struggling financially due to the COVID-19 crisis, this resource provides information on the relief programs offered by many of the major bank issuers of credit card products.

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In the days before debt settlement became so widely known by consumers as a bankruptcy alternative, it was often difficult for me to convince prospective clients that a bank would willingly forgive 50% or more of the principal balance on a credit card account. Consumer skepticism was very real in those days, since debt settlement was not very well known yet as a strategy.

Nowadays though, we are bombarded by radio and TV advertising for debt relief services, and the whole concept of negotiating with creditors became mainstream during the financial crisis of the past two years. Most people today are well aware that settlements are possible, and the main question has now become, “Should I hire a debt settlement company or do it myself?”

Here’s what the Federal Trade Commission had to say on the subject in a public release from March 2010:

Settling Your Credit Card Debts

If you’ve maxed out your credit cards and you’re getting deeper and deeper in debt, chances are you’re feeling overwhelmed. How are you ever going to pay it down? Now imagine hearing about a company that promises to erase your debt for pennies on the dollar. Sounds like the answer to your problems, right?

The Federal Trade Commission (FTC), the nation’s consumer protection agency, says slow down, and consider all the steps that can get you out of the red without spending a whole lot of green.
Many different kinds of services claim to help people with debt problems. Among them are “debt settlement” companies that negotiate with your creditors to reduce the amount you owe. Some debt settlement companies claim that they can arrange for your debt to be paid off for a much lower amount – anywhere from 30 to 70 percent of the balance you owe. For example, if you owe $10,000 on a credit card, a debt settlement company may claim it can arrange for you to pay off the debt for less, say $4,000.

But there is no guarantee that debt settlement companies can persuade a credit card company to accept partial payment of a legitimate debt. Even if they can, you must put aside money for your creditors each month and pay the hefty fees debt settlement companies charge before they settle any of your debts. On top of that, you may have to pay a final fee to a debt settlement company that’s a percentage of the money you’ve supposedly saved. Meanwhile, it may be months – or even years – before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually will add late fees and interest to the debt each month. That can cause your original debt to double or triple. All these fees will put you further in the hole.

When You’re In a Hole…

Ever hear the expression, “When you’re in a hole, stop digging”? If you need help managing your debt, it’s crucial to keep the lines of communication with your creditors open.

• Contact your credit card company, even if you have been turned down before. If at first you don’t succeed, be persistent. Keep good records so that when you do reach them, you can explain your situation. Your goal is to try to work out a modified payment plan that reduces your payments to a level you can manage. If you don’t pay on your debt for 180 days, your creditor will write your debt off as a loss; your credit score will take a big hit, and you still owe the debt. Creditors often are willing to negotiate with you even after they write your debt off as a loss. Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free. You can find the telephone number on your card or your statement.

If you decide to pay a company to negotiate your debt, do some research. Consider other people ’s experiences. One way to do that is to enter the company name with the word “complaints” into a search engine. Read what others have said. You are making a big decision that involves spending a lot of your money that could go toward paying down your debt.

• Another option is to contact a credit counselor. Reputable credit counseling organizations advise people on managing money, bills and debts, help them develop a budget, and usually offer free information and workshops. They should discuss your entire financial situation with you, and help you develop a personalized plan to get you out of the hole.

Finding reputable credit counselors has become more convenient. A new law requires credit card issuers to include a toll-free number on their statements that directs cardholders to information about finding nonprofit counseling agencies.

Most credit counselors offer services through local offices, the Internet, or on the telephone. If possible, look for an organization that offers in-person, face-to-face counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate nonprofit credit counseling programs. The federal government maintains a list of government-approved organizations, by state, at www.usdoj.gov/ust, the website of the U.S. Trustee Program. That’s the organization within the U.S. Department of Justice that supervises bankruptcy cases and trustees. Cross-check any credit counseling organization that says it’s government-approved against the U.S. Trustee’s list of approved organizations.

• Occasionally, a credit counselor may suggest that if these options don’t work, you consider filing for bankruptcy. Declaring bankruptcy has serious consequences, including lowering your credit score, but credit counselors and other experts say that in some cases, it may make the most sense. Filing under Chapter 13 allows people with a steady income to keep property, like a mortgaged house or a car, that they might otherwise lose through the Chapter 7 bankruptcy process. In Chapter 13, the court approves a repayment plan that allows you to pay off your debts over a three to five year period, without surrendering any property. After you have made all the payments under the plan, your debts are discharged. As part of the Chapter 13 process, you will have to pay a lawyer, and you must get credit counseling from a government-approved organization within six months before you file for any bankruptcy relief.

Red Flags

Avoid any company that promises to settle your debt if it:

• touts a “new government program” to bail out personal credit card debt
• guarantees it can make your unsecured debt go away
• tells you to stop communicating with your creditors
• tells you it can stop all debt collection calls and lawsuits
• guarantees that your unsecured debts can be paid off with pennies on the dollar
• requires that you pay the full fee within the first few months

Let’s take a closer look at the paragraph I find to be the most interesting part:

Contact your credit card company, even if you have been turned down before. If at first you don’t succeed, be persistent. Keep good records so that when you do reach them, you can explain your situation. Your goal is to try to work out a modified payment plan that reduces your payments to a level you can manage. If you don’t pay on your debt for 180 days, your creditor will write your debt off as a loss; your credit score will take a big hit, and you still owe the debt. Creditors often are willing to negotiate with you even after they write your debt off as a loss. Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free. You can find the telephone number on your card or your statement.

This is a mish-mash of advice that includes the obligatory talk about modified payment plans alongside discussion of negotiating with creditors. It’s also pretty confusing relative to debt settlement, since some of the best settlements can also be negotiated *before* the charge-off event at 180 days late, not just *after* the loss has been taken by the creditor. Settlements are totally possible both before and after the deadline, but some of the best deals take place before charge-off, via negotiation directly with the original creditor.

Here is the money quote: “Rather than pay a company to talk to your creditor on your behalf, remember that you can do it yourself for free.”

In other words, the Federal Trade Commission is telling you to stay away from third-party debt settlement firms and talk to your creditors yourself. According to the FTC, you can negotiate payment options or settlements on your own.

There you have it, straight from the horse’s mouth. The FTC has spoken and said that DIY debt settlement is the way to go. Nobody has to take my word for it anymore! 🙂

Now, I want to add an important point here, one that I intend to expand on in future posts. I think that I probably made a significant mistake years ago, when I built my program around the core concept of “do it yourself debt settlement” (DIY). A true DIY approach would include a kit with training material, access to an online membership forum, and that’s about it. Aside from those minimal resources, the consumer would be totally on their own. (There are already a bunch of DIY debt settlement copycats and imitators out there gunning for high volume enrollments into this type of “service,” which is no service at all unless the client upgrades to more expensive “traditional” programs. Watch for TV ads that will start pitching DIY settlement any day now.)

Here’s the thing – no training course, no matter how well-done, can possibly be sufficient for getting the job done *with maximum efficiency and minimum stress*. People get stressed out by the collection calls, become uncertain whether to take a deal or hold out for something better, and unsure when a legal threat is real or bogus. I came to that realization within a few months of publishing the first version of my training course in 2004. I learned that what people want is a COACH to take them by the hand and GUIDE them through the process. That’s what we do here at ZipDebt. We coach people on how to settle with the *specific set of creditors* on their list. That’s all, really. Simple enough. But it works like magic. Take a few minutes to read some of the recent testimonials posted on the ZipDebt Client Comment Forum, and it will quickly become apparent that none of these clients were “on their own.” They had coaching and assistance every step of the way.

If you take what the FTC published at face value, you might conclude that there is no middle route. Either pick up the phone and start talking to your creditors (maybe after doing some research online and hoping you find something useful), or hire one of these rip-off settlement firms the FTC is warning against. Of course, the FTC cannot promote a specific business model, so I wouldn’t expect them to be forthcoming about a third option – hire a coach!

With ZipDebt, you are not on your own. You’ll do the work of talking to your creditors, while a very knowledgeable coach sits in your camp the whole way and guides you to the best possible settlements. Or, as a happy client once put it, “Do it yourself, but get some help from a professional!”