Avoid These Financial Traps Part 3
2018 is upon us and with that many will look at ways in which they can better their lives or things they can change that they are not completely happy with. One such thing has to do with finances. In the last two articles I have addressed two traps to avoid this year when diving into your finances. In the first article I explained what a credit report is and why trying to build your credit is not the best option and in the second article I addressed debt consolidation and how using the debt snowball method is typically a better option for people. In this article I will address debt settlement companies and why to avoid them.
When you are looking for ways to get out of debt or help in doing so you will undoubtedly come across a debt settlement company who promises to negotiate with your creditors for a reduced pay-off. You in turn pay them a monthly sum and stop paying your creditors. The problem with this is that they are not paying your creditors either. If they were paying your creditors off for you it would be more like a debt consolidation, but that is not what this is.
The main reason that debt settlement works is because after your account has gone delinquent for a period of time determined by the credit agency, typically 180 days, your debt is written off by the company and sold at a very reduced rate to a credit collection agency. At this point in time the “debt settlement” actually comes into play and if you have the money saved you can usually negotiate a lower lump sum payoff to get out of your debt.
That Doesn’t Sound So Bad
Explained like that debt settlement companies don’t sound so bad, but there are consequences to doing this. First off, if you are at all concerned about your credit score it will be destroyed, remember you haven’t been paying your debts and neither have they. You will also be receiving increasingly more calls to collect on the debt that you owe. The longer your debt goes unpaid the more aggressive the calls will get and they are legally allowed to contact you once a day, even if the debt settlement company claims they can stop the calls. These calls will continue until your debt is paid off or settled and if you were not careful in choosing your debt settlement company in the first place you may not even get your debt settled; you may have been had by a scam company who just ran off with your money.
The biggest problem with debt settlement companies is that you can do it yourself. If you are truly in a situation where you cannot pay on your debts then you are in the position to negotiate yourself. Eventually if you have not paid for long enough your debt will be sold and you will soon be dealing with a debt collection agency who you will be able to negotiate with over time and by doing so you haven’t paid another company to do what you could have done yourself.
Dealing with Creditors
Quite arguably the worst part of not being able to pay your debts is dealing with their calls and their attempts to get their money. First you need to be able to acknowledge that it is their money. If you borrowed money from them, then you owe it, regardless if you feel like you owe it or if you have the means to pay them back. It is your debt and until you take care of it you are responsible and you cannot ignore it. If you think you can ignore it you will eventually find yourself in a lawsuit. They will not go away, even though you might get lost in the shuffle for a bit, they will typically find you in order to get their money.
So with the understanding that the collectors are not going away you have a choice to make. You can either deal with the situation or ignore it and as I’ve already said you can try to ignore it, but it is not going away so you might as well try to make the best of it. The best thing that you can do if you are in a situation where you cannot pay is to talk with your creditors. Creditors want their money and will be more likely to work with someone who is willing to work with them. If your original creditor writes off your debt and sells it to a collection agency they will sell it for roughly 5 cents on the dollar, so if you owed them $10,000 they would only get $500 from the debt collection agency so it is in the creditor’s best interest to work with you as much as they can.
Paying your Debt
If you are in a situation where you cannot make your payments but are still able to pay some money to them then you should pay using the pro rata method with simply means paying each of your creditors proportionately what you can. To do this you will first off need to have a strict budget so that you can figure out how much extra cash you have each month after you have paid for essentials. You will also need to know how much you owe each of your creditors, for this scenario you should not include secured debt such as home loans, car loans, etc. (Anything with collateral attached for security). Once you know how much you have to be able to put toward your debt and you know how much you owe each creditor you add up all of your debt and divide each individual debt by the total debt which will give you a percentage for each debt. With that percentage you multiply it by how much you have. This will give you an amount to pay each creditor.
Download your own Pro Rata Payment Schedule
This will likely not stop the creditors from contacting you, but it is to be used as a tool to keep making payments, even when you can’t make the full payment. When communicating with your creditors simply let them know that you are paying them as much as you can right now. Listen to their concerns and try not to get upset. You could even be proactive and call them each month when you send in your payment to let them know that you are still doing your best to pay them their money and that when you are able to pay more you will. They are used to people dodging them so they may back off a little bit if you contact them.
As we close I want to let you know that you are doing the right thing by trying to pay off your debts. Paying off debts when you don’t have enough money is very stressful and it can seem like you will never get out of the situation you are in, but remember that you didn’t obtain all of the debt that you have in one day, you likely accrued your debt over many years, so it will take some time to get it cleaned up.
Dealing with creditors can be difficult and there are a lot of different things that can make the repayment process easier. Each situation is different and because each situation is different each person needs their situation addressed individually. If you are facing a situation where you are struggling with debt or if you are already behind on payments contact me to find out what else you can do. I can help you work through different options, answer your questions, and help put you on a path to financial freedom. You do not have to do this by yourself and your situation is not hopeless. Please reach out today and let’s get a plan put together for you that will ease some of your stress and get you working a plan to get your debts paid off.
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