As a result of the dramatic changes in our economy over the past few years, a cottage industry has developed that is dedicated to providing consumer debtors with the “gospel” on how to get out of debt. However, while there are many voices giving advice on debt reduction, the guru of the debt reduction movement is Dave Ramsey. I am a listener and fan of Ramsey. To some extent, I am an adherent to his debt reduction philosophy. However, unlike Ramsey, I am an attorney specializing in consumer debt relief. While Dave Ramsey provides helpful information and good common sense advice on debt reduction, there is a lot he doesn’t tell you about getting out of debt.
The Ramsey approach to resolving debt is summarized as follows:
1. Start a small cash emergency fund.
2. Pay off the smallest debts first and the larger debts last using Ramsey’s “debt snowball” technique.
3. Build cash reserves with money that used to be paid towards debt.
While this is a valid method of debt resolution, it will likely result in the payment of far more money than is necessary to resolve the debt. Most debtors using this technique will end up paying 100% plus interest on the debts they wish to settle. Utilizing the services of a consumer debt specialist will yield a far more effective and affordable strategy for resolving and settling consumer debt. On behalf of my clients, I rarely settle any unsecured debt for more than 50% of the balance. In fact, many debts are eliminated altogether with no payment to the creditor.
When I am contacted by a debtor seeking information on how to resolve their debt crisis, there is never a “one size fits all” explanation. It is important to know the identity of the creditor, whether the debt has been assigned to a third party, the dollar amount of the debt, the type of debt, the law firm or collection agency handling the account, the debtor’s place of residence and the debtor’s overall financial situation. These factors determine the difficulty that the creditor will face in attempting to obtain a judgment and the extent to which they will try to obtain a judgment. If a case is difficult to litigate, or the creditor is not very aggressive in litigation, the debtor has more leverage in settlement negotiations.
There are two main types of creditors; original creditors and debt buyers. Original creditors are the banks and companies with whom you originally contracted. Debt buyers are companies that buy collection accounts for a substantial markdown, with the intent to make a profit through collection of the debt. Generally, debts can be settled with debt buyers for far less than you would pay to an original creditor. One reason for this is that an original creditor is attempting to recover the money loaned as principal in addition to the interest that forms their profit. A debt buyer on the other hand, usually makes an investment of no more than 2% to 5% of the face amount of the debt.
Therefore, it takes less money for a debt buyer to turn a profit. The identity of the creditor is also important in pre-litigation in order to assess whether the creditor is likely to sell off the debt or to retain and collect the debt in-house. Many debt buyers often employ practices that run afoul of the Fair Debt Collection Practices Act and generally have little documentation to support their claims. A counterclaim in a debt buyer lawsuit will often result in a dismissal of the debt. Original creditors employ various settlement policies and guidelines. This information, if unknown to the debtor, will result in the payment of more money than necessary. From an attorney’s perspective, the overriding concern is the probability of successfully defending the debtor against a collection lawsuit. The stronger the possibility that a debtor can win a lawsuit seeking a judgment on the debt, the more leverage that they will have in settlement negotiations.
Even though we win the overwhelming majority of consumer credit lawsuits we handle, some are harder to win with than others. For example, lawsuits involving credit card debts, foreclosure confirmations and auto repossessions are much easier to win than medical debts and homeowner’s association dues cases. Knowing the type of case helps in evaluating the value of the creditor’s claim and to determine how much should be offered as settlement. The amount of the debt can also affect the possibility of settlement. While it would seem to be common sense that the larger the debt, the more you have to pay, that is not always the case.
For example, I recently received a call from an AMEX representative stating that a new policy was in place for a limited time allowing credit card accounts with balances over $25,000.00, and that were in litigation, to be resolved for 20% of the face amount of the debt. However, accounts in litigation with balances of $15,000.00 or less could only be settled for 50% of the face amount of the debt. Under this policy, the larger debt will settle for less than the larger debt. However, this option is only available to debtors that hired an attorney to fight the lawsuit. Where the debtor is involved in litigating the debt, it pays to know the law firm and the judge you are facing. Many collection firms handle every case the same way. Knowing their methods helps to exploit their weaknesses. Knowing a judge’s attitude towards collection cases and his knowledge of civil procedure is also important in determining how to best defend the debtor’s case. Lastly, the county where the debtor resides will be where the suit is filed. This information helps in assessing the length of time the case will take to get to trial and the distance to be traveled by the creditor’s witnesses to the court when engaging in settlement negotiations. Out of state creditors rarely produce a witness for trial.
Another flaw in Ramsey’s approach is that he fails to acknowledge bankruptcy as a legitimate debt resolution strategy. While we utilize bankruptcy only as a last resort, for some people, bankruptcy is their best method of debt resolution. Any person truly seeking to help someone facing a debt crisis will honestly evaluate the debtor’s entire financial situation to determine whether the debtor can and should file bankruptcy in order to escape a financial meltdown. No one should be advised to risk their family’s financial well-being in order to make interest payments to a bank or credit card company.
My approach to debt resolution is much different from the Ramsey approach and can be summarized as follows:
1.) Stop paying your unsecured creditors immediately.
2.) Dispute the debt in writing and seek validation and verification of the account and amount.
3.) Do not speak with the creditors on the phone.
4.) Save all of the money you can afford to be used later to settle those debt accounts that you cannot defeat through litigation.
5.) If you are sued by an unsecured creditor, hire an attorney who specializes in Consumer Debt to defend you.
6.) Settle only those claims offering substantial reductions and those you cannot defeat.
7.) If you have no assets and no ability to save funds, determine whether you qualify to file a Chapter 7 Bankruptcy.
The largest weakness in Ramsey’s approach to debt resolution is that it fails to recognize fighting the collection effort and reducing the debt as a valid means of debt resolution. Payment of the debt is the only option he provides. Although it is counter-intuitive, it is the refusal to pay that makes the creditor willing to negotiate. As long as you believe that you owe the creditor every penny they ask for, they will continue to ask for more money. Once you accept that the debt settlement process is a negotiation and not a moral obligation on your part, the more effective you will become at freeing yourself from debt.
