Before I discovered Ramsey, I was in a rather destructive pattern.  My credit card was my backup funding.  This is flawed thinking, and will absolutely get you in trouble if you’re holding credit cards as emergency funds.  Guess what, it’s not even real money, and your credit card company has every right to reduce your line of credit whenever they see fit.

Note:  If you bow to the almighty FICO god, thinking your credit score is some sort of measure of success or source of self-worth, then you’re bound to be in debt, for a long time.  Break that bond.

My income is dependent 100% on commissions from home sales.  By helping you get yourself out of a sinking ship, your lender is willing to allow compensation to the brokers involved, because banks aren’t in the real estate business, and the commissions they allow are far less than the costs of litigation due inexperienced real estate dealings.  Banks don’t want to be in real estate.

Debt Settlement Companies

Just like any other service that we order to make our lives more convenient, whether it be maid service, public accountants, piano teachers, or anything else, the service can be well worth what you pay.  And then there’s debt reduction companies.  Most of these services are run by unscrupulous individuals who know that while you possess the skills required to be in debt and use a credit card, you probably don’t possess the skills you need to effectively negotiate a settlement with your lenders to be release for less than you owe.  They know that you’re probably feeling bullied by your lenders, and you don’t have the fortitude to stand up to them when they treat you disrespectfully.  After all, you are the customer, and why should you be treated like that?

Debt reduction companies are, for the most part rip-offs.  In fact, their sales pitch typically has you believing that you have a right to not pay your debts.  They take your money up-front, and then over time, to negotiate with the credit card company with which you have the agreement. It’s good money after bad.  Don’t fall prey to these debt reduction scams.  It’s not necessary.  They’re simply doing exactly the same thing you could do on your own, if you knew how. Thesis

When and Why Will A Lender Settle?

When they aren’t getting paid.  That’s the bottom line.  If a lender sees that the risk in having their money in your hands has become too great because you’ve stopped paying them, they’ll jump at the chance to recover some of their funds.  Notice, I mentioned some of their funds. The reason they’ll settle is because they can’t make money if they don’t have it, and they make their money by lending to other people like you, who show less risk.  As soon as they can take what you’re able to give and lend it to someone else, they’ll do it.

But I Owe, So I Should Pay

That’s right.  You do owe.  You borrowed the money, and you should pay it back.  However, the laws of physics come into play here.  If you’re taking care of the 5 basic necesseties of life and you still don’t have money to pay your debt obligations, it’s time to start the process.  Once you settle, morally, you still owe the money, even if the lender has written it off.  In time, it would be wise to come to grips with that debt, and eventually offer to pay it back.

So What is the Process?

Note:  Get ready, you’re probably going to be getting lots of phone calls.  If you’re smart, you’ll get yourself a new number and update your lenders on that new number before you get going on this process.  Keep this number separate from your normal lines of communication, so you know what’s a collection call, and what’s not.

Step 1: Stop paying your bill.  I know, it sounds crazy, but if by paying your monthly bill, you’re falling behind in day to day living, like being able to eat, or keep your lights on, then you should already have stopped paying anyway. By the time you’ve reached this point, you’ll probably already have learned this lesson.

Note:  As soon as you’re able to, whether it be by increasing your pay, or cutting other costs, start socking away money for the settlement.  Your credit card company will probably propose multiple payments for your settlement.  You want to do it in one lump sum if you can.

There’s a delicate time period between your first missed payment and the time the credit card company sells your debt to a collection agency.  Ideally, you want to deal only with your credit card company, so you don’t have to negotiate additional fees and attorney’s fees, etc.  You don’t want this process to go that far.

Step 2: Wait.  Soon you’ll be receiving phone calls from the lender.  Let it go.  Don’t let the phone calls get you down.  Don’t let them bully you.  You can eventually ignore all of the calls until you’re ready to settle.

Note:  DOCUMENT, DOCUMENT, DOCUMENT.  Use a google calendar to mark down every time they call you, and if you talk to them, make notes on the calendar items about the phone call, what was said, and who you spoke with.  Also note the time of day.  Keeping these details will make you a hero if someone questions your ability to recall events.

Step 3: As soon as you have a chunk of cash, take your proposal to the lender.  Record the phone calls you make to them using a phone app.  I use Recorder for the iPhone, which charges a mere $1.99 for one hour of recording time.  It’s well worth it.

Note:  Open a new checking account with an online bank, like ING Direct to hold the exact amount of your settlement.  Your card company is going to want you to make the payment over the phone, and under no circumstance do you want to give them access to your primary checking or savings account number.  Ideally, you want to settle by sending a certified check via certified mail, return receipt requested, but often they won’t allow that.  So, this is your countermeasure; create an account that contains no more than the amount you’re willing to settle for.

Step 4: Your lender will probably tell you what they’ll be willing to accept. Consider the amount, and if you need to let it go a bit longer, do so.  Eventually you’ll win.  Counter their offer with a lower amount, then wait.

By this time, you’re already poised to give them a payment.  If they’ve accepted your offer, and you’ve recorded this conversation (learn about your local laws regarding phone recordings and how they can be used, or if they can be used as evidence) then you should be good to go.  Make the payment, and wait for their paperwork confirming the settlement.

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