The single most important factor in the success or failure of any settlement
program is the availability of funds for settlements. The most common question
I am asked when I explain debt settlement to people is, “If I can’t
pay the monthly payments on my accounts, how am I going to be able to come up
with funds for settlements?” This is a good question.
Like many things in life, credit and debt are a game. The game is heavily rigged in favor of the banks and finance companies you borrow money from. The reason it’s rigged that way is somewhat justified. Lenders take a risk every time they make a loan. They may not get paid back. To state the obvious, banks and finance companies have something we, the consumers, need or want quite a bit—money. They agree to lend you money by giving you a loan or a credit card if you promise to pay according to the terms they set forth in their contracts. If you don’t agree, they won’t give you the money—it’s pretty simple. He who has the money makes the rules. The terms of the agreement require you to pay back a specific amount of money per month. The money you pay is divided between the interest on the money you borrowed and the principal balance on the debt. (The principal is the amount of money you actually borrowed or charged on your credit card.) This “game” seems to work out pretty well for you as long as you are able to make the payments. You get to buy houses, cars, and other goods and services that you would not otherwise be able to buy if you had to pay for the purchases in full with cash. It doesn’t work so well for you if you can no longer afford those payments due to some life event creating a financial hardship for you.
What many people don’t realize is that such a financial hardship can shift the “balance of power” as it relates to your interaction with
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your creditors. If you are not giving money to your creditors every month, you can start “making the rules” in that relationship. Of course the “cons” of debt settlement given in Chapter 1 have to be kept in mind, but you do have some leverage with the creditors because you are in control of when, how much, and on what terms you will pay them.
Here is how you change the rules of the game in order to settle your debts with your creditors. If you don’t have access to a chunk of money you can use to negotiate settlements with your creditors, you have to put that money aside gradually until you have sufficient funds to negotiate lump sum settlements with your creditors one at a time. Let’s say you owe at total of $8,000 on four credit cards, and the total of the monthly payments on those four cards add up to about $280. If you can’t afford $280, but you can afford $180, you’re $100 short. You can decide which creditors get paid with your $180 per month. Obviously one or more creditors are not going to get paid. You can also decide to make a different decision about your payments the following month. Maybe a creditor who got paid last month won’t get paid this month. You are making the rules. The problem with playing the game this way is that you will fall further and further behind and you won’t have a way out. The creditors you don’t pay will add on late fees and interest and your balance will rise. You won’t be accumulating any funds toward settling the debt because you’re paying everything out every month. The hole you’re digging will get deeper and deeper. What else can you do?
You can put that entire $180 aside every month until you can settle one account. No one gets paid every month, but your funds can accumulate to the point where you have a lump sum of money to offer to a creditor on a settlement. I recommend opening a special bank account for that purpose. Further I recommend using a different bank than the one your regular checking account is in. Ideally, the account you open will not come with an ATM card. The idea is that it should be inconvenient for you to spend the money that you are putting into that account. Successful debt settlement depends utterly on your ability to accumulate funds that will only be used for settlements. If you can go to your bank’s Web site and transfer those funds instantly to your checking account or if you can take cash out of your settlement account at will just by going to an ATM, you are less likely to succeed at settling your debts. You should set up regularly scheduled electronic
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transfers from your checking account to your settlement account. Even better—if you have direct deposit, have the funds taken from your paycheck and deposited into your settlement account. It would be ideal if the account you set up for your settlement account also has a bill payment option. Again, deposits to your settlement account should be easy, while withdrawals should be inconvenient. It doesn’t matter what bank you put your money in, just try to get an account with features similar to those described above.
The next question most people ask about financing settlements is, “How much money will I need per month?” This is a difficult question to answer because the answer depends on your particular situation and when you want to be out of debt. Though I can’t give a specific answer, I can give a couple of methods for figuring out how much you should be putting toward your settlements per month.
You can calculate it based on how long you want the whole process to take. The first step is to figure out how long (in months) you want your entire settlement program to take. From there you can calculate how much you need to put into your settlement account each month to achieve that. The formula is this:
Total Debt × 60%
This calculation assumes two things. First, your balances will go up over the time you’re working on settling the accounts due tointerest and fees. Second, you will settle your accounts for 50 percent of the increased balance due at the time of negotiations or less. For example, if you have $8,500 in debt and you want to be done in 36 months, the calculation would go this way: $8,500 X 60% = $5,100. $5,100 ÷ 36 = $141.67. You would need to put $141.67 per month into your settlement account in order to settle your debt in 36 months. If you can’t afford $141.67, then you would need to lengthen your time estimate in order to bring the required amount down to something you can afford.
You can approach the calculation from a different angle by using the amount you feel you can comfortably afford to put into your settlement account to figure out how long it will take you to settle all your debts. The formula for this is similar to the first one.