Debt 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 problem?
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 accuracy?
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 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 has made 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 budget.
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 burden.
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!
Again, debt 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 people become debt-free without bankruptcy since 1997.
A former executive in the debt settlement industry, he teaches the do-it-yourself method
of debt negotiation. Audio-CD material plus expert personal coaching helps consumers achieve
professional results at a fraction of the cost.
