8/8/2019 Get Out of Debt the Right Way

1/3

Get Out of Debt the Right Way

by Shitakwa Zacharia

Nancy Rivers was working full time in 2007 teaching computer skills to union workers inMichigan when she got a flyer in the mail inviting her to a seminar on starting an Internetbusiness.

"At the time I thought it was some type of scam, but I figured I'd get a free dinner out of it," saysRivers, 37. "They ended up talking me into it. They sold me space for six different websites andoffered all kinds of support and training, which of course cost money. They said, 'put it on yourcredit cards, you'll be making this back so fast you can pay it off.' Well, it never happened."

Rivers, who had an excellent credit score and never carried revolving debt, continued to workfull-time while running her business selling candles online. She says in her best month, during

the holiday season, she sold 30 candles, but most months averaged five or less. In 2009 she losther teaching job after the bankruptcy of General Motors, her firm's largest client. She ran throughher savings and maxed out six credit cards and a personal loan to the tune of $80,000. At onepoint, she lived on canned goods from her pantry.

When Rivers finally landed a new job, she called all of her creditors, asking to set up repaymentplans. Most refused outright, and one wrote off the debt, trashing hercredit score. She beganlooking for a debt management program, and chose Columbia, Md.-based Care One, the onlyprovider she could find with an A+ rating from the Better Business Bureau.

Rivers paid a $30 enrollment fee and $50 a month for the debt management plan. Care One

negotiated her interest rates, which averaged 28 percent, down to 9 percent, reducing hermonthly payment from $2,500 to $1,136. (Rivers called back two of her creditors who would notparticipate in the Care One program and negotiated lower interest rates on her own.) SinceFebruary, she has paid off $12,000 in debt, and if she stays the course, will be debt-free in justover four years.

Management vs. Settlement

Rivers is emblematic of a recent trend: Women burdened by higher debt levels than in the past.In 2009, 45 percent of women who contacted CareOne for assistance had $50,000 or more indebt -- up from 33 percent in 2007, according to a recent company study. The fastest-growing

demographic: Divorced and widowed women over age 55. In addition, more upper-incomewomen are seeking debt assistance. Between 2007 and 2009, the number of women CareOneclients earning $60,000 or more a year grew 38 percent.

"We hear from women who have been in the workforce a long time, who have been laid offorare in industries that are not growing, so their skill sets are outdated," says Jenny Realo,executive vice president and chief product officer for Care One. "They used up their savings tosurvive and used credit cards for managing day-to-day expenses -- groceries, utilities and rent.

8/8/2019 Get Out of Debt the Right Way

2/3

They are finding themselves having to go back to school to get additional skills or switch to anentirely new field and take a lower-paying job."

A study by the Federal Reserve Bank of Chicago found workers who lost jobs between 2001 and2003 and were re-employed by 2004 earned an average of 17 percent less -- double the average

loss in weekly earnings incurred in the late 1990s.

Under traditional debt-management plans, debtors agree to repay the entire principal they owe atreduced interest rates, with fees removed, so the combined debt can be eliminated in three to fiveyears with a single monthly payment to the debt-management firm. These plans contrast sharplywith debt-settlement programs, which are rife with problems. Last week the Federal TradeCommission announced new rules which ban upfront fees, regulate how these plans operate andrequire more disclosures.

In debt settlement programs, upfront fees previously ran as high as 20 percent of the client's debt.Some companies required clients to deposit a monthly payment into a designated account and

suggested they stop making payments to creditors, allowing interest and fees to snowball. Oncethe balance in the designated account was large enough, the companies would purportedlynegotiate a lump-sum settlement with creditors to reduce the overall debt by half.

But in many cases, creditors sued the debtors for non-payment, and settlement companies tooktheir fees from the special accounts without delivering the promised relief. Since the start of therecession in 2007, the council of better living has received more than 3,500 complaints aboutdebt reduction companies.

The FTC rules require companies to disclose how long the process will last, the total cost andpotential negative effects of settlement. Also, customers can withdraw funds from the designated

account at any time with no penalties, among other changes. (Anyone considering debtsettlement should read this "We fully support the advance-fee ban and believe consumers shouldonly pay the provider when the service has been delivered," says Realo, whose firm also offersdebt settlement. Realo says she would like to see the FTC rules apply to nonprofits as well. "Thedirty little secret is that nonprofits (debt settlement programs) are paid by the creditors -- thenonprofits receive a 'fair share payment,'" says Realo. "As they collect funds on behalf of theconsumer, they are paid a percentage by the creditor."

Understanding Alternatives

Care One doesn't accept funds from creditors in debt settlement, but instead charges customers$35 to $50 a month plus 30 percent of any savings recouped from negotiations with creditors.(Thus if a $40,000 debt is reduced to $20,000, Care One receives a $6,000 "success" fee.)

That's a far cry from the 5 percent fee cap that would be imposed by currently moving throughCongress, introduced in April by Sen. Charles Schumer, D-N.Y., and Sen. Claire McCaskill, D-Mo.

8/8/2019 Get Out of Debt the Right Way

3/3

Under the FTC rules, which go into effect Oct. 27, consumers could conceivably remove fundsfrom their designated accounts and try to settle directly with creditors, avoiding settlement fees.But they should make sure any agreement is legally binding.

"We have had creditors tell customers 'we will only negotiate directly with you,'" says Realo.

"They ask for the money to be sent from escrow, and the debtor releases the funds to the creditor,who then reneges on the settlement offer. We have legally binding documents (creditors) have tosign before we release funds. Consumers should make sure they are fully informed before doingthe deal themselves."

The other problem is that debt settlement companies often shoe-horn consumers into a planwhether it's appropriate or not, says Scott Crawford, CEO of Debt Goal. "Debt settlement couldhave been decent solution if it were limited to people a step above bankruptcy," Crawford says."But they were taking people who could get out of debt on their own and steering them towardan unhealthy solution. If you can make your minimum payments, and hold that dollar amountconstant as your debt goes down, you'll be out of debt in three to four years."

For $15 a month, DebtGoal offers online "DIY" tools that allow consumers to understand theirdebts, create pay-down plans, optimize their savings and track their progress -- as well as receivecommunity support, a sort of Weight Watchers program for debt.

"One of the most damaging things about debt settlement is it has spread an expectation that thereis a magical way out of debt that doesn't involve any personal responsibility," Crawford says. "Ican wave a magic wand and 50 percent of your debt goes away. At the end of the day, it's a biglie -- either you tank your credit or you're defrauded."

Rivers says she's starting to see the light at the end of the tunnel. "I had never been in thatposition before in my life -- it was very depressing," she says. "I still have lot of debt, but I'mmaking progress and putting money in savings in case something happens and I lose my job.Now I feel like I'm finally getting my head above water."