Caring Currents

Five Debt Triggers -- One Simple Solution

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Last week at a summer barbecue, a friend from high school told me a really scary story. When her parents, in their 80s, almost lost their house last year after her father's state pension disappeared, Karen co-signed an equity line of credit to bail them out. When they couldn't make those payments, either, the bank came after her. Now both families are on the verge of bankruptcy.

Sadly, but not surprisingly, this is only one of many stories I've heard like this lately, both in my life and from members. In fact, I've heard so many stories with such similar themes that I made a list of the top five triggers that seem to most commonly get multiple generations of families in trouble with debts they can't pay.

  1. Medical bills. Who wouldn't help a family member out in a health crisis? But the need can be so great that it sinks everyone.
  2. Mortgage payments. When one family member is about to lose a house, it's natural for another to step in. But co-signing loans or loaning money to make payments can make one disaster into two.
  3. Property taxes. In my family this was what tipped the scales; my sister had to borrow $20,000 to cover my mother's unpaid property taxes and keep her house off the county auction block. Luckily, this was before the downturn, and my mother was eventually able to pay her back by refinancing her house.
  4. Credit card debt. While this type of debt is individual, we've heard from many members about parents deeply in debt and adult children wondering how to help them.
  5. Gambling debts. Lonely older people are vulnerable to casino policies that can rapidly turn small debts into big ones.

If you're in this situation, I'm hoping that reading this list is making you feel better. You're not alone, and it's important not to let shame keep you from getting help.

Now let's turn to the bright side. So many people are in so much trouble with debt right now that new services have sprung up to help. What these services, known as "debt negotiation," or "debt settlement," do is step in between you (or your parents, or siblings, or kids) and the bank or credit card company you owe money to. They negotiate for you, aiming to come up with a compromise that leaves you with an amount you can pay, and placating the bank with an amount that gets them off your back. Although in the past "debt consolidation" was often a scam that got people in worse trouble, these new companies -- under the right circumstances -- offer a real solution, and an alternative to bankruptcy.

This is no isolated trend: Yesterday one of the biggest of these companies, Freedom Debt Relief, announced that during the month of July they settled 5200 separate accounts, saving their customers a total of $16 million and settling a record $27.2 million in debt. They also released their totals from January through July of 2009, and during that period they settled a whopping 30,000 accounts! There, does that make you feel better?

But here's the key piece of information: On average, the people they helped ended up paying just over 40 percent (41.8 percent, to be exact) of what they owed -- and were out of debt! Another way to look at this: The banks and credit card agencies they owed money to forgave 58.2 percent of the debt.

How is this different from debt consolidation, a solution experts advise people to avoid?

Debt consolidation is usually done in the form of a consolidation loan, or in the form of "credit counseling, or a combination. The loan consolidates all of your debts into one single monthly payment, which does simplify matters. However, it's traditionally secured with home equity, so there's the danger of losing your home. And the total amount that you owe isn't reduced, just lumped together. The "credit counseling" part of this is where it really gets confusing; debt consolidation companies promise to work with your creditors to negotiate lower interest rates and payments, -- but not the balance due. And since they're often funded by credit card companies, the ultimate goal is to make sure the full amount of the debt is paid back.

Debt settlement, by contrast, is a compromise between you and the credit card company -- you pay some of what you owe -- and don't go bankrupt, which would leave them with the debt unpaid. In return, they forgive a good portion of your debt.

Several caveats: These companies do charge fees, in addition to the proportion of the debt you have to pay off. The fee is assessed at the end, when the debt settlement has been negotiated. Also, you can end up owing tax on the amount the debt settlement company saves you, if the difference between what you pay and what you owe is more than $600. Depending on your situation, you may have to report it to the IRS as "discharge of indebtedness income."

Also, you usually have to pay a portion of what you owe, typically about 15 percent, up front; then you have two to four years to pay off the rest of the agreed-upon balance. But during the rest of the debt negotiation process, you don't make monthly payments and you aren't charged monthly fees, as you are with debt consolidation.

So how do you find one of these companies, and -- more important -- how do you make sure it's legitimate and not a scam?

Start by checking with The Association of Settlement Companies, or TASC, an organization that oversees good practices in what's now called "the debt settlement industry," and which has standards that a company must meet to be a member and use the TASC logo. To find a TASC-accredited debt settlement company near you, you can use their "Find a member" function.

TASC lists 187 active members, so as you can see this is a fast-growing industry. But I wouldn't just get a name off a list, no matter how carefully vetted. The only way we're collectively going to get out of this economic mess we're in is if we all start talking openly about it, and helping one another. So ask people you know and respect in your community if they know of a debt settlement company or, better yet, have used one. You'll be surprised to find out how many people you thought were doing just fine have had to ask for help.