consolidation, equity loans, credit counseling, debt management
plans, even Chapter 13 bankruptcy – it doesn't matter which of these
debt programs you're talking about. They all suffer from one fatal
flaw, the number one problem that causes most people to fail at
eliminating their debts through these techniques. Can you guess the
It's probably not
what you're thinking. It's not the fees, interest rates, or the
quality of the companies behind these debt solutions. No, the number
one problem with most debt programs is that they require FIXED
monthly payments without exception. This major flaw is the main
reason that very few people make it through a credit counseling
program or a Chapter 13 bankruptcy plan.
Do you make
exactly the same amount of money each and every month? If you are
like most people, the answer is probably NO. It's easy to understand
why. Salespeople, for instance, often experience ups and downs based
on how much commission they earn from one month to the next.
Seasonal workers experience boom and bust times depending on the
time of the year (think retail workers getting lots of overtime
around the holidays). Overtime hours come and go depending on
company workloads. Part-time jobs may offer hours that vary widely
from week to week. And so on.
Now, what about
your expenses? Do you spend exactly the same amount of money each
and every month? Sure, your mortgage or rent and your car payments
are a set amount each month. But doesn't your utility bill go up and
down depending on the weather? What about your phone bill? How much
will you spend on car repairs over the next 6 months? Medical bills?
Dental bills? Can you predict such variable expenses with any
If you have lots
of room in your budget, with money left over at the end of the
month, then fluctuating income and expenses are probably not a major
issue for you. However, if you are struggling to make ends meet,
living from one paycheck to the next, then an unexpected expense can
destroy your monthly budget.
People enter debt
relief programs with the best of intentions. Take credit counseling,
for example. You enter a program to get some help in bringing your
credit card debts under control. The monthly payment of $500 sounds
good. You're humming along just fine for a few months, then wham!
The water heater blows up. Time to shell out $800 for a new one.
Unless you like cold showers, you'll need to skip the $500 payment
to the agency this month, and part of next month's payment as well.
Where does that leave you with the credit counseling program? Back
on the street, that's where. You simply CANNOT miss payments into
that type of plan and expect anything but failure.
Or look at Chapter
13 bankruptcy, where the court requires you to pay a set monthly
amount to your creditors over a 3-5 year period. Even before the
drastic new law went into effect, 2 out of every 3 people failed at
Chapter 13 bankruptcy. It will get much worse under the new law,
because the court will set your monthly budget for you, based on
what the IRS says it should be for your state and county. This is
simply unrealistic, and once people realize how bad the new law is,
they will run in the other direction from Chapter 13. (Forget about
Chapter 7, where you wipe the debts away. The new law will make it
very difficult to qualify for the old Chapter 7 fresh start.)
Again, the big
problem with most debt relief programs is lack of flexibility. You
cannot call your loan officer, the credit counseling agency, or the
court trustee and say, "Hey, my kid broke his leg and I had to pay
the hospital $500 to cover my insurance deductible, so I'll need to
skip my debt payment this month." If you could, then these plans
might have a chance of working. But such inflexible programs simply
do not reflect the unpredictable nature of the average household
So is there any
debt program that does provide this flexibility? Yes. It's called
debt settlement, or debt negotiation. It's certainly not for
everyone. Debt settlement is an alternative to bankruptcy. It's not
for people who can pay their bills in full without hardship. But it
can be a real blessing for those seeking relief from a crushing debt
The reason debt
settlement is so flexible is simply because YOU control the cash.
You build up money in a separate savings account until you have
enough to make a reasonable offer to one or more of your creditors.
Like any debt program, debt settlement has its downside and its
risks, but no other program provides this level of flexibility.
Because the monthly payment is going into a negotiation fund that
you set up and control, a bad month simply means you have less money
to settle with. If you can make it up later, that's great. If not,
that's life. When you have enough to settle ONE account (usually
between 35% and 50% of the balance owed), then you make an offer. If
your creditor takes the deal, then you start building up funds to
knock out the next debt, and so on. It's the only program out there
that recognizes a basic reality: Your budget should set the pace for
your debt elimination program. Not the other way around!
settlement is not a magic bullet. It won't cure every debt problem.
But if you need to skip a month, or adjust up or down a little to
reflect what's going on in the real world, it doesn't mean the end
of the program. It's truly a shame that the financial "experts" who
have set up the bankruptcy rules, consolidation loan terms, credit
counseling plans, and debt management programs haven't figured this
out yet. If they would just recognize this fundamental problem, then
the success rate on their programs would increase dramatically and
they could stop misleading the public about what works and what
doesn't in the world of debt relief.
Charles J. Phelan
has been helping consumers become debt-free without bankruptcy since
1997. A former senior executive with one of the nation's largest
debt management firms, he is the author of the Debt Elimination
Success Seminar™, which provides
comprehensive instruction in do-it-yourself debt settlement that
saves $1,000s in fees.
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