QUESTION: Jake on Twitter asks how Dave feels about debt management companies. Can they help him? Dave says he’d stay away from them no matter what.
ANSWER: I would stay away from a debt management company no matter what. If you go to the Federal Trade Commission’s website, ftc.gov, you will find that the level of complaints on debt management companies is one of the top categories of all things complained to the Federal Trade Commission. In other words, there are a ton of them that are scams and/or incompetent, operate poorly, don’t do a good job and so on. That’s problem number one.
Problem number two is you need to fix your situation. You can fix it a lot cheaper than paying someone else to do it. The majority of these people collect their fees upfront, and you may or may not get anything from them after they do that. If you’re not able to pay your payments, pay what you can and take the ones that you can’t pay and begin to work and save to do your own settlement with them as fast as you can.
Debt settlement companies do not simply wave a wand and make your debt go away. The only reason a creditor is going to take less than is owed to them is if they think they’re not going to get paid. They don’t settle just because it’s inconvenient for you to be in debt. They don’t take less than is owed to them when you’re current with them. After you’ve not paid for many months, because I’m assuming you couldn’t pay and you’re six months behind, then they will look at you and settle if they think they can get what you’re offering. Always do that in writing, and always—no matter what happens—do not allow them to have electronic access to your checking account, no matter what they say, no matter what they threaten because I will tell you from experience, they lie. They will clean out your checking account. So they get no money unless it’s in writing, they get no electronic access, and you settle with them yourself. But I would not use a debt settlement company.
QUESTION: Barbara in Alabama was feeling desperate because of her $10,000 in debt and signed with a debt settlement company. Has she made a grave mistake? Dave thinks so, and tells her exactly how she should get out of the deal.
ANSWER: The only way I know how to answer this question is what I would do if I were in your shoes. I have seen—in my experience—about 90% o these companies be complete con artists. About 10% o them are simply incompetent. Maybe 1% ae on the up and up. The Federal Trade Commission says the most complained category of all consumer categories is debt settlement. So I know what I would do. I would cut this deal off right now. I'd stop it. I wouldn't give them another dime. I would consider whatever money you've given them lost. They're not going to refund you. And I'd get away from them and do my own debt settlement. I would not wait on somebody else to take care of my life, and I certainly wouldn't allow myself to get ripped off. If you don't believe me, go to the Federal Trade Commission's website, ftc.gov, and look up debt settlement and see all the complaints and numbers of attorney generals that have filed cases against them around the nation. It's just a horrid industry.
QUESTION: David in Kansas City has a daughter with a structured settlement as a result of her mother’s death. It’s paying out in increments. She’s 21 and wants to buy a house as a single mom. Should she cash out the settlement and take the lump sum? Dave tells David he has to weigh the ramifications of cashing it in early and how big the hit will be.
ANSWER: You’d have to sell the settlement. The insurance company on a wrongful death or a settlement of this type is not going to cash it out. It would be very unusual if they will. If you sell it out, you’re selling it out at a discount. What you have to be very careful of is how deep the discount is. There would be nothing wrong with getting a buyout of a structured settlement so long as the discount’s not so deep that you wished you hadn’t done it. That means that if you had taken the money slowly and invested it well, would you have ended up with a lot more?
There’s a process and a financial formula called a discount rate, which would be the equivalent in this case of what interest rate she could earn were she to invest the money. You just don’t want a discount rate of higher than 8–10% i something like this. That rate is not that they discount the total by 8–10%. t’s a formula that’s stuck into the program. The 8% i stuck into a formula that’s going to discount that depending on how long the time is. It could discount it almost in half in terms of the total. The longer the term, the deeper the cut is going to be of the total.
You’re going to see a pretty good hit on that, because if you took a lump sum today and invested it, how much would it be by the time she’s 47? That’s the concept. It’s called present value. Would you rather have $100,000 today or $100,000 when she’s 47? I’d rather have it today because of all the interest I could earn in the meantime. That’s the crux of this formula. You’re going to see with that long of a structured settlement a pretty deep cut.
I would sit down with a financial person and crunch the numbers. I’d shop around with what you’ve got to some of the companies that buy out these settlements and see what kind of offers you can get. Talk those over with the ELP, and crunch the numbers to see how bad a hit she’s taking. I’m a little nervous about a 21-year-old getting a big hit, but if she’s got her head screwed on good, then it’s not a problem. Buying a house is certainly a good thing to do with it.
QUESTION: Louise in Salt Lake City is calling on behalf of her mom. Her mom received a letter from CitiBank regarding a debt settlement. Her mom is going to accept the settlement, but when Louise asked for a letter saying that it’s settled, CitiBank wanted electronic access to her mom’s account. Dave advises against giving them access.
ANSWER: You have got to be kidding me. That should have been your response. You should have laughed and said, “You’ve got to be kidding me.”
Their offer will come back, or we’ll get a better offer out of them. If you don’t pay them for three or four years, they’re going to be flexible. That’s just absurd. I mean, why does it expire? Do they not want money? I would lose the deal.
Here’s the thing: You don’t have a deal. So you haven’t lost anything. The problem is you have to give them electronic access for the letter to be good. We’re not doing that. If you give them access, you’ll have to close that account after you do it because you won’t ever be able to use it again. Don’t have a dime more than the settlement amount in the account because they’re going to take that, and periodically, they’ll try to take more. They lie.
If they don’t take the amount out by the time the letter expires, you’ve got to clean that account out and close it the next day. They’ll take it out later and then say they didn’t receive payment until after it expired. They won’t honor the letter.
If you can’t get something in writing and hold these people ironclad, you’re going to get messed over.
QUESTION: Renee has $29,000 in credit card debt. She enrolled in a debt settlement program, which told her they can bring that total down to $14,000. She is paying them $430 a month and has paid a total of $3,000. Her husband brings home $50,000 and they have 4 kids. Dave explains to her that she can do much better than this company is in settling the debt.
ANSWER: One of the top areas of financial things that are complained about to the Federal Trade Commission as being a scam is debt settlement companies. They are hugely unethical. There are legit ones, but as a group, they are bad. All their fees come up front. You’ll pay them thousands in fees before they do anything. They’ve told you not to pay your bills and that totally destroys your credit. The credit card companies will settle with someone who is months late because they think they won’t get paid.
The problem has been that they collect their fees up front, and then go along like that, and they won’t return your calls. They don’t put forth the effort that you will in settling your debt. You’ve paid $3,000 and that would go a long way in settling your $29,000 in debt. Get out of the program and do this yourself.
Pile up as much cash as you can to attack your first credit card before you call them and settle. They usually settle with something that old for 25 cents to 50 cents on the dollar. Get an offer from a debt settlement agency in writing and don’t give them electronic access to your checking account. If you get sued, don’t ignore a lawsuit. Your odds of being sued if you are talking to them and working with them is very low.
QUESTION: Tori just settled with her credit card company, but gave them electronic access to her checking account. They said they would send her a letter accepting the settlement amount, but it hasn’t arrived yet. They will draft the money out tonight. What will happen?
ANSWER: I hope it goes through, but our experience has been that they lie and will clean you out. This is a huge mistake. Whatever money you put in there, they will take out, and they will keep doing it until they get the full amount. You must get the settlement offer in writing.
Call them back right now and tell them that they can’t do the deal … that there’s no money in the account. Get them to send you a letter declaring the settlement, and you will overnight a cashier’s check to them. There is a 5% chance that this will happen like they promised. But more than likely, they have lied. Close the account, also.
ANSWER: Most past-due bills will take a settlement and medical bills will usually take a settlement for pennies on the dollar since they’ve gotten most of their money from the insurance companies. Go to them with the $1,000 you still owe them, tell them you’ve got $250, and they’ll most likely take it. Just make sure you get the settlement agreement in writing.
ANSWER: Put the first $2,000 a year into an ESA (educational savings account).
If the child could possibly have future medical issues related to the accident, you should set aside money for those expenses.
Invest the rest in good growth stock mutual funds.