You also need to understand that the “free if we can’t settle your debt” promise is a wolf in sheep’s clothing. Working with a debt-settlement company means suspending your payments until you owe enough to the creditor to put the debt-settlement company into a good negotiating position. So while you may not owe the debt-settlement company anything, falling behind comes with a huge cost:
• Being behind on payments will trigger interest and fees, and may even trigger a higher rate of interest to kick in.
• Once the late payment is reported to the credit bureau, it will affect your credit score negatively. A lower credit score may, in turn, trigger higher interest rates on other debt (like your mortgage at renewal or your secured line of credit), even though you’re up to date with those payments.
If it turns out that creditors are unwilling to accept the debt-settlement company’s plan, the debt-settlement company can walk away from its deal with you, waving its “we won’t charge you” promise as your consolation prize. But you will now be even further behind, you will have totally ruined your credit history, and you’ll be back at square one in trying to solve your debt problems.
Once you enter into a debt-settlement agreement, get ready for the collection calls. While some debt-settlement companies say they’ll help you avoid the horrible and unrelenting calls from collections agencies, this isn’t a done deal. In fact, some creditors who realize you may be working with a debt-settlement company will escalate their collection attempts. If the creditor takes legal action, the debt-settlement company may drop your account.
Make sure you see the documentation from your creditors, which supports your debt-settlement company’s claim that interest has been suspended. Don’t just believe what they say. If interest will continue to be charged while you are going through the process, know what those charges will add up to over the life of your debt-settlement plan.
OPTION TWO: DIY DEBT SETTLEMENT
If you think you’re a candidate for debt settlement, but don’t want to lay out for the fees, you can take a DIY approach. Here are all of the steps you need to take:
Step 1: Figure out where you stand. Write down what you owe and to whom, and the interest rate you have been paying. (You’ve already done most of this work in Chapter Two, so go get your notes.) Do not include any secured debt like a car loan, a line of credit tied to the equity in your home, or your mortgage. Do not include co-signed or joint loans, since the moment you start negotiating, the creditor will go after the co-signer or joint signer.
Step 2: Get a copy of your credit report. You want to see what’s already been reported so you know what your creditors are seeing. Look at your outstanding bills and identify how far behind on payments you are. Label the bills: less than 30 days, 30 to 60 days, 60 to 90 days, 90 to 120 days, 120 to 150 days, and 150 to 180 days. Remember that no one will even talk about settlement if you’re less than 90 days overdue.
Step 3: List your debts. Now organize your list of the bills from highest amount owed to lowest. Your list must include the company you owe (their address, telephone number, and a space for their fax number), how much you owe in total, and how late you are on each bill. Leave some space on your list so you can break out what you owe in terms of principal (what you actually borrowed) and fees/interest that have accumulated. You may have to look back over several statements to differentiate between what you spent and the interest you’ve racked up.
GAIL’S TIPS
If an account has been “sent to collections”—if it has been placed in the hands of an outside agency to collect—you cannot negotiate with the original lender. You must deal with the collections agency. You can use the same debt-settlement strategies with a collections agency, but you can’t go back and try to pay your original lender. The collections agency may now “own” the debt (yes, they buy the debt and then attempt to collect more than they paid to make a profit), and you’ll still owe them the money even if you’ve sent a settlement to the original lender.
Step 4: Create a budget. You did this in Chapter Four, right? (You did, didn’t you?) Now it’s time to show your creditors just how much you have available to pay your debt so you can convince them the whole amount is at risk. You want to demonstrate that you’re serious about fixing your problem, but that you have limited resources with which to work and need their co-operation to solve the problem.
Step 5: Plan your strategy. You can do your debt settlement in one of three ways:
You can decide to offer a lump-sum settlement on the bill. You’d start by offering 25% of the outstanding balance, and negotiate from there. You’re aiming to settle for as close to 50% of the principal as you can.
You can decide to offer a short-term payoff. You promise to repay the full amount outstanding LESS fees and interest within three to six months. (You’ll be astounded at what you can save if the interest and fees are eliminated.) You’ll give postdated cheques if they wish, but only if you get an agreement in writing to waive all interest and fees and not deposit cheques before their due dates. Otherwise, they’ll bury you in fees.
You can decide to offer a long-term payoff. This should take no longer than three years. You’ll no longer use the credit, you’ll get a significantly reduced interest rate, and you’ll always be on time with your payment.
The best of these three options is the first. But that means you’ll have to come up with the money to make the settlement.
Step 6: Find the money to settle. This is where the rubber meets the road.
• Will you get an extra job and bank the money strictly for your debt settlement?
• Will you reconcile yourself to a crappy credit history because you’ve already been sent to collections and stop making payments on your bills so you can bank that money?
• Will you sell everything that isn’t a complete necessity to come up with the money?
•Step 7: Get ready for the collection calls and threatening letters. If you decide to use debt settlement to get out of debt, you’ll stop making payments on your debt to force your creditors to pay attention. As soon as you’re three months late, your phone is going to start ringing off the hook. There are rules about when collections agents may call. But they will call. And your lender will send letters threatening to sue your pants off. When you took the loan, you did sign a legally binding contract. You’ve breached that contract and your lender can sue you. But they most likely won’t. Legal action is very expensive, and it’s often not worth the time or money it takes to collect on small to medium-sized debts. If you do get sued, don’t panic. Remember, you’re in this to get a settlement. Being sued is your lender’s way of forcing the settlement. And if they agree to an out-of-court settlement, the suit will go away. You can work it out.
Step 8: Prepare your settlement letter. On page is a sample debt-settlement letter you can use as a guide.
Step 9: Call your creditors. Starting with the guy to whom you owe the most, it’s time to make the call. Here are some things to remember as you do:
• Be polite and sincere in your desire to solve the problem. Getting angry and yelling won’t help your case. Neither will threats. However, letting your creditors know how desperate your situation is will, so tell them that you owe a lot of people a lot of money and you don’t have a snowball’s hope in hell of paying it all off.
• You have to “sell” them the benefits of your plan. Offer to fax them a copy of your budget and your settlement letter.
• Tell them how dire your situation is and that you have made the same offer to your other creditors. The guy on the other end of the line has to believe that it is in his best interest to settle with you or he won’t be motivated to deal. It is up to your creditors to accept your offer. They may come back with a counter-offer, and you’ll have to weigh whether you can come up with the extra money or not. If you cannot, be upfront and say that your resources are very limited. If you can, say that it may take you a little longer and that you want them to turn off the interest
clock and stop any fees from building up while you come up with the extra money.
• Do not, under any circumstances, give your creditors your bank account information.
GAIL’S TIPS
If, when you call, the representative does not want to entertain the idea of settling, ask to speak to a supervisor. Not all agents have the authority to negotiate, so you may have to escalate the call until you find someone who does. If you have no luck on Tuesday, call back on Thursday. It is very unlikely you’ll get the same account representative, and you may get to someone who is in a much more genial mood. (What, you think these guys don’t have good and bad days too?) Be persistent.
Step 10: Keep detailed notes. Get the full name of any representatives with whom you speak, along with their phone numbers. Consider recording the calls. Yes, you can do this. As long as one party is aware a call is being recorded (that’s you), it’s perfectly legal in Canada. And keep every single communication they send you even after the debt is paid. Here’s one set of documentation you want to file under “forever.”
Step 11: Get it in writing. Once you negotiate a settlement with a creditor or a collections agency, you must get it in writing. You MUST get a written settlement offer from the creditor or the collections agency in your hot little hands before making a single payment. If you don’t, the original creditor may choose to see your payment as a “partial payment,” or another collections agency may attempt to collect the balance from you.
GAIL’S TIPS
A creditor has the right to report your settlement to the credit bureau as “settled for less than owed.” That means future potential lenders will see that you didn’t pay in full and figure you for a deadbeat. As part of your agreement with your creditor, you want to ensure this doesn’t happen. Ask for a commitment in writing not to report (or to have them remove) negative statements that will damage your credit record.
Step 12: Settle up. Do not ever send cash to settle a debt. Use a cheque so that you have a paper trail for your payment. Don’t send postdated cheques unless you have their agreement in writing not to cash them before their due dates, since some creditors try (and succeed) to cash them all at once and that’ll set your bank account twitching.
Step 13: Check your credit report. Wait 90 days and then verify that your credit report has been updated as agreed. If not, send a copy of the settlement letter to the credit bureaus and request in writing that your information be changed as per the agreement.
Step 14: Rinse and repeat. Yup, it’s time to call the next creditor on the list and go through the whole process again.
STAY BALANCED
Please, do not become so desperate about your debt that you fall for the predatory promises of fly-by-night companies offering to save you thousands and put a stop to collection calls. While I’m not overly fond of credit counselling services—you do know that these guys are funded by credit card companies, right?—they are sometimes a better alternative to paying huge fees only to end up two steps back.
Debt settlement is a time-consuming process, and lots of people just aren’t up to the task of figuring out the ins and outs so they leave it to credit counsellors. But know that if you can DIY, you’ll likely get a better deal. And you have the option of negotiating to save your credit history. The moment you sign on with credit counselling, you might as well have gone bankrupt, because future lenders view the R7 of credit counselling the same as the R9 of bankruptcy for lending purposes, and you’ll be as popular as a fox in a henhouse.
Whether you choose to do it yourself, seek help from a debt-settlement company, or go to credit counselling or a bankruptcy trustee, you must have a plan to make sure you’re never in this position again. That means making a budget that will work and sticking to it. And it means accepting that if you can’t pay for something today with cash, using credit is only going to start you back down the road to Debt Hell. For heaven’s sake, learn the lesson and don’t make the same mistakes again.
Sample Settlement Letter
Your name
Your address and telephone number
The date
Your creditor’s name
Address
Re: The account # you’re settling
I, (your name in full), wish to settle the outstanding debt (account number) with (name of creditor).
Explain why you’ve fallen behind and then end with:
I really want to get this debt paid off and am willing to make the following offer:
The current balance on the account is $. I am currently able to settle this amount for $. I would like to offer you this sum on the understanding that it is in full and final settlement of my debt, that I will be released from any liability, and that neither you nor any associated company will take further action to pursue this debt.
As part of this settlement, I’m requesting that you sign this letter as a written confirmation of our agreement, that you stop any legal action against me, that you delete any negative listings on all credit bureaus to which you report, and that you give notice that the account has been settled in full or “satisfied” to all the credit bureaus to which you report.
Upon acceptance of this arrangement, (creditor name) agrees to the terms and settlement conditions outlined here and I, (your name), will send a money order in the amount of (settlement amount) paid to (creditor) by (date).
In return, (creditor) agrees to forward this letter to all credit bureaus so negative listings will be deleted.
Print your name
Print the date
Sign your name
ACKNOWLEDGEMENTS
Thank you to all the people who helped me make this book my best yet. Curtis Russell, agent extraordinaire, persisted and convinced me this was the right time to do a new book, and then found me a great publisher with which to work. The folks at HarperCollins pulled out all the stops, especially Kate Cassaday, who made the editing process painless and took the book from good to great! Her perspicacity and persuasiveness left me in awe. My friend Kathryn read an early draft and asked good questions.
I also want to acknowledge my fans and web-peeps. These are the folks who keep me honest, listen patiently to my rants, and urge me to create the tools they need to take control of their money. It is because of them that I pulled up to a keyboard and started writing again after several years of no tap-tapping. Thank you for asking for this book so doggedly! I hope as you read this you can hear my voice, encouraging you to be all you can be.
INDEX
I was of two minds in creating this index. While I think an index can be a great tool for finding information fast, it can also be a shortcut for people who just want to focus on one area. That’s a mistake. Your financial life has to be seen in the larger context of your whole life, and if you do one part without taking care of the other details, your plan won’t work. So I give you this index with a warning: this is not a tool to circumvent the system I’m presenting here. If you want to be Debt-Free Forever, if you want to take control of your money and your life, you must read the book from beginning to end. If you want to check back on something once you’ve been through the book, here’s the index.
Page numbers in bold refer to material found in tables and charts.
Page numbers in italics refer to blank worksheets.
A
analysis, spending, 10–20
Spending Analysis Worksheet, 11–17, 21–23, 64, 66
attitudes
towards money, 46, 274–75, 278–79
towards work, 138–39
automobile. See car
B
balance transfers
credit cards, 95, 98–100
line of credit, 95, 100
bankruptcy, 97, 246, 255, 256–67
Bankruptcy and Insolvency Act, 259
co-borrowers/co-signers and, 261
consumer proposals, 258
credit reports and, 122, 267
debts not discharged by, 260
living expenses d
uring, 263
RRSPs and, 262
student loans and, 127, 260, 261
beneficiaries
changing, 227–28
estate, 243, 244
life insurance, 228
RESPs, 242–43
scholarship plan, 204
Budget Worksheet, 60–61, 67, 73, 91–93
budgeting
goal setting and, 86, 159, 163–66, 170, 175, 181, 214, 216, 217, 293, 294
C
Canada Deposit Insurance Corporation (CDIC), 200–201
Canada Education Savings Grant (CESG), 201–203, 243
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