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"Debt Relief"

Although bankruptcy is one form of debt relief, not all debt relief requires bankruptcy.

There are many debt relief companies out there, making all sorts of promises. The typical ad promises to reduce your debt by 50-70%. If only it were that easy.

The typical fees for such services range from $500 to $2500. Most of the fees are non-refundable. Most of the services are non-existent.

Many of my clients come to me AFTER they fell for these scams. In a typical scam, the debt relief company insists they be paid in full up front before they will negotiate on your behalf. By the time you are paid up, you may have a judgment against you, because they do NOTHING to stop creditors. They may get some creditors to call them instead of you so you stop getting calls and you think your problems are solved. Nothing could be further from the truth.

Some claim to be non-profit to induce your trust, but are really profit making companies.

Plus, it’s generally not a good idea to give your personal information to strangers.

More people go to these companies than to lawyers because unscrupulous people do not hesitate to lie and make representations and promises they can’t keep.

If you are scammed by one of these companies, complain to the Federal Trade Commission, but it may be too late for you to get your money or your credit back. In the meantime, your debt keeps going up and up astronomically because of the high default interest rates, up to 32%. They can leave you in worse shape than when you started.

“Settle your debts for pennies on the dollar!” they scream. You think to yourself that you’d be a fool not to do this. But the reality is that kind of deal is not going to happen. This is what happens when you settle a debt for less than the full amount. You make a payment for the partial amount. If you are lucky, they stop collecting. If not, they keep collection activities going despite their promise to settle. They may resell the entire debt to another company to continue collecting. However, even if they stop collecting, you’re still not out of the woods. The creditor will issue to you at the end of the year a tax form known as a Form 1099. The 1099 will be in the amount of the debt they did not collect from you. The problem? According to the IRS, forgiven debt is taxable income. That’s right – you pay tax on the part of the debt they forgave – perhaps as much as 37% of that amount. So you traded in an unsecured debt problem for a tax problem. And guess what? Unlike your credit card debts, which you could have discharged in bankruptcy, the tax debt won’t go away, even if you do file bankruptcy later.

Sometimes debt settlement can help. When it can help, you might do as well or better on your own instead of hiring a professional. From time to time, I have helped some clients with debt settlement negotiations and I can make the following comments.

1. Forget about common sense. Companies follow internal policies that have nothing at all to do with common sense or actually getting debts paid. If you propose something reasonable, expect to have it turned down. If you are current but about to go into default, forget about getting any kind of deal. They’ll just mark your file, lower your credit limit and start bothering you. If you get the impression they’d rather have no money than some money – you are right. On paper, they make more money when they don’t settle. They WANT your interest rate to go from 9% to 30% even if it results in not getting paid a dime. It’s a business model. They think that, eventually, enough people will pay that inflated amount to make it worth their while to play hardball.

2. The older the debt, the higher the debt, but the better the chance of a significant settlement or reduction.

3. Debt collectors can give you a better deal than original creditors. Debt purchasers can give you a better deal than collectors because they paid pennies on the dollar. But be careful, because some of them didn’t buy the actual debt, just a right to collect. I’ve even seen a company claim that they “leased” a debt.

4. Some collection firm lawyers will give you a payment plan even after a judgment. Usually, it’s for the full amount of the judgment and has to be paid within two years and they get interest, but the interest rate is much lower than a credit card. You need to make sure the agreement provides for them to issue and file a warrant of satisfaction of judgment with the court

5. Sometimes garnishment is a good thing. If you have limited income and no real assets on which to levy, there can only be one garnishment at a time (unless it’s a governmental debt), so it forces your creditors to stand in line and wait their turn.

6. Some creditors are now keeping the debt collection in-house to avoid countersuits under the Fair Debt Collection Practices Act. They will not negotiate at all with debt settlement companies and will use their in-house counsel to file collection lawsuits.

7. Threatening to file bankruptcy doesn’t really work – they don’t care – see number 1 above. However, sometimes if you hire a bankruptcy lawyer, they understand you are serious and will offer a written lump sum settlement offer – usually from 60-70% of the amount due at that time. Recently, I've seen some offers as low as 15%, but be careful, they often use tight timelines and tricky language to try to get out of the agreement after you have paid.

8. If you have regular cash flow, sometimes a good budget will let you pay your debts without a bankruptcy. I’m pretty good at lowering budgets because I insist on practicing what I preach and my own family follows a pretty tight budget.

HOW TO AFFORD DEBT PAYOFFS–

1. LOWER SPENDING

Budgeting. Budgeting is like dieting. If you really feel you are depriving yourself, the budget will fail. My own budget allows for splurges, and entertainment so the budget doesn’t feel so restrictive. You’d be amazed at how many live shows are free or low cost in the NY/NJ area. There are inexpensive restaurants with high quality food that cost a lot less than McDonald’s. Supermarkets with wholesale and near-wholesale prices. The key thing is to make a lifestyle change. You can’t keep spending like you used to spend. The old ways are dead - so bury them and move on.

Change your choices. You can’t afford to go to the movies. Neither can your kids. But you might be able to see an off-off Broadway show for the same price or even less. It is absolutely possible to get some culture and save some bread. Twenty bucks gets you a movie and a medium popcorn at an AMC movie theater. The same twenty bucks just got me 2nd row at the New Jersey Performing Arts Center to see the New Jersey Symphony. Skip the popcorn - get the culture.

Bartering. The barter economy is alive and well. You can trade skills. Save on babysitting by taking turns with a friend – one evening you watch her kids – the next, vice versa.

Coupons? No – I’m not a big believer in couponing. Usually a supermarket offers its own store brand for less than the coupon price on the brand name. There’s really no difference. But you can save money by not buying anything displayed at the end of the supermarket aisle. The less expensive stuff is on a lower shelf near the bottom. If it's harder to reach, it's usually cheaper.

Comparing prices. This is vital these days. The supermarket that has cheap milk has expensive vegetables and vice versa. They have to make a profit somehow. Don’t do one-stop shopping. Convenience costs you money. Stick to your shopping list. No impulse purchases.

Stop using credit cards. They confuse you as to how much money you are spending and create a false sense that you can afford things.

2. INCREASE INCOME

You can get out of money problems two ways – 1. lower spending and 2. increase income. A spouse can get a job, you can get a second part-time job, you can work overtime if it’s still available. Avoid get rich quick schemes like internet marketing. But maybe you can sell some of your stuff on e-Bay. . .

Correct your withholding. If you over-withhold, you are giving the government a free loan of your money. If you under-withhold, you are giving yourself a large tax bill at the end of the year. Try to get it just right. Tax debt is the worst. Getting withholding right puts more money in your pocket.

Keep receipts. A decent tax preparer can find deductions that lower your taxes, which is effectively the same as getting a salary increase.

Motivate yourself. I know that telling you to make more money sounds easy while it’s really hard, but think about this. Drug addicts find ways to make money to support their habit, many without breaking the law. Are you saying you’re not as smart as a drug addict? They just have more motivation. Work the problem, keep it in your mind, and keep at it and you’ll figure it out. Even in a bad economy, there is still SOME money to be made out there.

A final piece of friendly, if not legal, advice – after all, you’re not my client – not yet anyway. If you want to read further and get advice from other experts, at least trust my personal opinion about this. Avoid Suzy Ormand and Robert Kiyasaki and Donald Trump. Avoid all the experts who appear on public television – many of them are on television only because they purchased the airtime to do their lectures - which are really infomercials. I have very little respect for some of these so-called experts. I believe their main goal is not to help you, but rather to sell their books. I’m not selling a book. I’ve heard the most terrible advice come out of these people’s mouths. My colleagues agree with me that Suzy doesn’t understand bankruptcy. I've heard that Kiyasaki made his money by selling nylon wallets and selling books through Amway, not in real estate. Not all of Trump's projects make money; sometimes he doesn't own things even though they are called Trump - he licenses his name a lot, and Trump Entertainment is having major financial troubles - again. The bad economy and strategies to deal with it change constantly, sometimes week by week. What works one week may not work the next - so NO ONE is a true expert anymore. If they say they are, run for the hills.

Never forget – if it SOUNDS too good to be true, it IS too good to be true. Period.