Debt Settlement: Not a Quick Fix

Advertising for debt settlement is becoming quite common. You may have received an email, seen a late night commercial, or heard a radio advertisement promising to eliminate your debt for pennies on the dollar. Very rarely do any of these advertisements address how long the debt settlement process can take. There are several factors that will dictate this time frame.

How Much Debt

First you need to determine how much existing debt you have that you would like to settle. The best way to determine this amount is to look at your most recent statements or contact the creditors directly for an updated balance. In addition to the principal loan balance, you will want to include any past due interest, late charges, or fees.

Late Fees and Interest Charges

Next you need to take a look at the terms and conditions of the accounts. During the debt settlement process, you will stop making payments to your creditors. You need to understand how much monthly interest will accrue as well as what impact late fees and penalties will have on your existing balance. Also important to note, if you have not yet gone late on the account, is any impact missing a payment will have on the underlying interest rate. Many accounts have a universal default clause and will increase your interest rate if you go late on the account or an account with another lender they may be monitoring.

Monthly Cash Flow and Existing Assets

How much do you have currently saved that could be used in the debt settlement process? Some consumers will borrow from a retirement account, use money in a savings account, or even sell some of their personal belongings to raise cash. Also, how much do you have available each month to contribute to a debt settlement account? Keep in mind that you will no longer be making monthly payments to the creditors of the accounts you would like to settle.

Do the Math

It is now time to pull out a piece of paper, calculator, and a pen. You'll want to use two columns. One column will be for the amount you have saved in your settlement account and the other column will be for your increasing balances that you are hoping to settle. The rows will represent individual months moving forward.

For purposes of this exercise, assume that most creditors will settle for 50% of the existing balance owed.

Start with the first month and include any existing money you can use to fund the settlement account as well as your first month's payment to that account. In the second column, list the current balance for the account(s) you would like to settle.

For each following month, list the new balance in your settlement account due to an additional payment and your new outstanding balance owed to your creditors resulting from additional interest, late fees, and penalties.

To estimate how long the debt settlement process will take you, do this exercise until column one equals approximately 50% of column two.

A very simplified example would look like this :

Month	Settlement Balance	Debt Balance
1	$5,000	$20,000
2	$7,000	$20,600
3	$9,000	$21,250
4	$11,000	$22,250

If you choose to work with a debt settlement company, you will need to factor in the fees or costs of their services.

This exercise will allow you to estimate how long it will take you to settle your debts. In most cases, you will find that this can often take 12--36 months. If after this exercise you determine that it will take longer than 36 months or your debt balance is increasing at a rate faster than your settlement account balance, you may need to explore other options such as bankruptcy.

About the Author:
Chris Rocks is the Founder and Executive Director of the Credit Advisory Alliance (CAA). CAA is a nationwide membership-based organization that assists consumers recovering from a financial difficulty and those who need a significant increase in their credit score.

Chris began his financial services career as a Financial Advisor helping young families with risk management and asset accumulation strategies. It was during that time that Chris realized that many of these young families also needed someone to guide their choices with regards to debt management.

He made the transition into the mortgage industry where he first worked as a loan originator and later the Vice President of a small mortgage company. As Chris came across clients who had suffered through financial challenges and saw the difficulty they had in re-entering our credit driven economy, he discovered there was a real opportunity to leverage his unique background and help others.