Credit Card Settlement- Why Negotiated Agreements are Becoming a Better Alternative to Bankruptcy

Prior to the recession, credit card companies were realizing a tremendous return on the outstanding debt of American consumers. From 2000 on, the average consumer was bombarded  by finance companies on a daily basis with offers of credit cards with extremely high credit limits. There was no process in place  to review whether or not the consumer would be able to repay the debt if the full limit was used. They were handing credit cards out like candy and realizing high returns on each account.

If you are a user of credit cards, you are acutely aware of the financial trap that one can easily fall into, I am referring of course to the repayment of debt by paying only the minimum amount due. This is exactly what the companies want you to do, since the minimum  payment is comprised  primarily of interest only on the account. A consumer caught in this cycle of repayment finds them on a treadmill to nowhere, opening up statements month to month barely seeing any progress toward debt reduction. As the consumer added accounts, the burden of making the monthly payments became harder and harder.

Couple this trend of consumers increasing their debts with a recession that hit like a tidal wave and you can understand how many Americans are now in a position where they can no longer meet their monthly obligations. I am in no way placing the whole blame on the credit card companies, they were loose with extending credit, but the consumer could have been more discipline in their money management. It seems that it just became a matter of the credit card companies seeing profit margins rising and the consumer believing that carrying a debt load was not a great risk, after all the housing markets were experiencing home value increases never before seen in this country. The average consumer felt protected by this cushion and just kept borrowing more and more. The housing market bubble  burst and here we are today with a fully realized unemployment rate of 17.2%, taking into consideration  people who have exhausted their unemployment or have just given up looking for a job.

We now find ourselves with homeowners upside down with their mortgages and credit card debt that they are unable to pay due to a loss of a job or a cut back in hours. The question is, what should the consumer do to rectify their financial circumstances, declare Bankruptcy or enlist the services of a reputable attorney-based debt settlement company.

Bankruptcy comes in two in two forms, Chap 7 and Chap 13. Chapter 7 entails the elimination all of the consumer’s outstanding debts. One must hire an attorney and prove to a court that they are unable to pay off their debts based on income ratios and the value of their personal property, primary residences and cars are usually protected. The Chapter 13 involves a similar process, but it differs from the seven based on income that shows that the debtor is able to repay a percentage of the debt, these plans last three years on average. Of course each state has its own guidelines and one should consult an attorney to determine those details. The impact on a person credit can last up to ten years, affecting the ability of the consumer to obtain credit.

Attorney-based debt settlement enlists the services of a company that offers strict enrollment procedures to ensure entering into the program is appropriate for the consumer. There is an initial consultation with a debt analyst who conducts a financial profile looking at the net household income and the client’s monthly debt obligations, excluding the debt they want to enroll. The analyst then formulates a plan to settle the debts ranging from 12-40 months, reducing the debt by 40-60%. After this is done, the analyst must see that the client will realize a clear financial benefit, in other words there must be a positive cash flow each month.

Furthermore, the client must be experiencing a “Hardship” that is causing them to consider enrollment, for example, job loss or illness to a spouse that is reducing their household income. This is probably one of the most important aspects of acceptance,  as the attorney who approves the case will not accept someone who has the ability to pay their debts and just wants to enroll so they can eliminate debt cheaply. Once the Analyst determines that the client meets all the criteria for enrollment, the file is submitted tho the legal department where an attorney reviews the file and either accepts or rejects the file for enrollment. The settlement process does have a negative impact on credit, but most  people enrolling already have negatives on the report due to high credit balances or late payments. This method offers the client a quick resolution to their debt problems and a quicker turnaround in reestablishing their credit.