Here’s what it involves:

You stop making your payments to your unsecured creditors. Instead you start making a regular monthly payment to a separate savings account. (These payments are typically lower than the minimum payments you probably have been making.) After your debts go unpaid for several months, they will typically be charged off by your lenders. That means the  lenders write them off their books as bad debts, but they can still try to collect on them.

At the same time, you will build up your savings account. At that point, the company will negotiate settlements on your debts-sometimes as low as 25 cents on the dollar, but usually in the 50 percent to 75 percent range.

Under most programs, you will be completely out of debt (at least unsecured debt) in anywhere from twelve to thirty-six months depending on your total debt. Twenty-four months is a typical program. Your total payoff will usually be 50 percent to 60 percent of the amount of debt that you entered the program with, including the fees charged by the settlement company.

So if you have $20,000 in debt, you might enter a debt settlement program calling for two years of $500 monthly payments. After twenty-four months at $500 a month you would have paid $12,000 including fees to settle your debts, or just 60 percent of the $20,000 originally due. Of course the final numbers will depend on your individual situation but the plan can work in certain cases.

A few things to keep in mind about debt settlement:

• You need to make sure the money you send in for your savings account to settle your debt is held in a separate trust account away from the debt settlement companies’ operating funds.

• You’ll want the company to handle calls from creditors. In most cases, they will get a limited power of attorney to be able to communicate with your creditors for you. This can alleviate the harassment you may be experiencing if you are falling behind.

• Many consumers in a hardship situation are able to get those taxes waived by the IRS, but you’ll want to get advice from a tax professional.

• Debt settlement is for consumers in a hardship situation, not for those who just don’t want to pay back their debts or pay high interest rates. The debt settlement company should qualify you based on your financial picture.

One of the most common fears people face when considering debt settlementis the fear that they are somehow immorally wiggling out of debts they legitimately owe. Don’t be so harsh on yourself.

First of all, there is nothing immoral about paying back as much as you can. Life happens and people run into problems. The credit card companies know, when they extend huge credit lines and hike up interest rates to percent plus, that some people won’t be able to pay them back. They are still enormously profitable.

Secondly, if you are in a hardship situation and don’t take this step, then your next option will likely be bankruptcy. In that case, your creditors may get nothing.
So do what you have to do. Pay what you can. Then get on with your life so you can focus on building wealth, which benefits our entire economy (including the credit card
companies!).

Barclays(Juniper credit card) – $4521
Providian 1(chase) – $9046
Providian 2 Business(chase) – $4640
Paypal GE Money Bank – $1182
Merrick (Hooters card) – $9000
Household Bank – $3500
GM Flex Card(hsbc) $1783
Capital One – $1200
Wells Fargo Financial – $2849
Staples – $1000

That equals to about $42,000 worth of unsecured credit card debt. 3 of the accounts have been charged off. These 3 accounts I will not pay, unless the Collection agency will provide me in writing a letter stating that if I pay X amount of dollars to settle the account then the account must be deleted from my credit report. These are commonly refered to as a “Pay for Delete”.  I am expecting to sell my only asset, which is a classic car. This will hopefully new me around $25,000 to pay off all of this debt. My goal is to be able to pay off all of this debt and still be able to put $10,000 in a savings account. How will I pay of $40,000 worth of debt with only $15,000? Stay tuned to find out.

Debt stress impacts our relationships as well as our physical and mental health. The divorce rate is well over 50 percent and reportedly the number one reason for divorce is financial trouble. Couples argue more about money than any other relationship issue.

Stress, anxiety, and depression are common for those with uncomfortable amounts of debt. Feelings of guilt, shame, and failure all impact self esteem and lead people to feel as if they are out of control or powerless. Add to this the fears of what will happen if the bills are not paid, the aggressiveness of many creditors and debt collectors, and the constant pressure to continue spending, and it is no wonder that some Americans actually end up taking their own lives as a means to ending the spiraling feelings.

Debt stress has also been linked to substance abuse and the accompanying health problems (including an increased risk of violence) associated with this illegal activity. On the legal side of substance abuse, many people react to stress by abusing alcohol or legal prescription drugs. Spending has become such a problem for some people that the pharmaceutical industry has taken notice. Shopping has long been recognized as an addiction for those whose spending interferes significantly with their lives. In fact, it is estimated that 8 percent of American adults (90 percent of these being women) suffer from this addiction. Research has shown that this compulsive spending is
linked to low serotonin levels in the brain. Drugs that increase serotonin are now being tested to treat compulsive shopping.
Another serious health concern related to financial problems is the fact that people will often forgo treatment for physical (or mental) illness in an attempt to control debt. This too often leads to more serious ailments and even death. In addition, those in financial turmoil are more likely to go against doctor’s orders and return to work sooner in order to pay the bills-medical bills included-thus increasing their chances of reinjury or relapse.
In one 2004 survey, 63 percent of Americans said that debt was making their home lives unhappy. The online survey of 5,000 consumers by Consolidated Credit Counseling Services, a nonprofit money management organization, found that:

• 43 percent reported a debt-to-income ratio of 50 percent or more.

• 58 percent of participants stated that their credit cards were at or near their maximum credit limit.

• 62 percent of participants did not have a savings account.

• 92 percent had no emergency fund for three months of living expenses .

• 37 percent had taken cash advances from one credit card to make monthly payments on another credit card.

• 59 percent paid only the minimum amount due on credit cards each month

Of course, if you think about it, what’s kept you from racking up big balances before now? If you’ve been pretty responsible with credit in the past, you’re likely to continue to be pretty responsible in the future. That’s the basic principle behind credit scoring: It rewards behaviors that show moderate, responsible use of credit over time, because those habits are likely to continue.

The score also punishes behavior that’s not so responsible, such as applying for a bunch of credit you don’t need. Many people with high credit scores find that one of the few marks against them is the number of credit accounts listed on their reports. When they go to get their credit scores, they’re told that one of the reasons their score isn’t even higher is that they have “too many open accounts.” Many erroneously assume they can “fix” this problem by closing accounts.

But after you’ve opened the accounts, you’ve done the damage. You can’t undo it by closing the account. You can, however, make matters worse. Closing accounts can hurt you in two ways:
• Closing accounts can make your credit history look younger than it is. Your credit score factors in the age of your oldest account and the average age of all your accounts. So closing accounts, particularly older accounts, can ding your score.
• Closing accounts reduces the total credit available to you, making your debt utilization ratio soar. Remember that the FICO formula measures the gap between the credit you use and your total credit limits. The wider the gap, the better. If you suddenly lower that limit by shutting down accounts, the gap narrows and that’s a bad thing.

This is true whether or not you keep a balance on your credit cards or pay them off in full every month. Remember: The FICO formula doesn’t differentiate between balances that are carried and those that are paid off.

To be on the safe side, don’t dispute more than three or four negative items at once, unless your disputes are related. And don’t pay anyone a fat fee to do this for you.

How quickly you’ll reestablish credit and how much you’ll pay for it will depend largely on your behavior after you file for bankruptcy. If you start handling credit responsibly-paying your bills on time, not running up big balances, and not applying for a bunch of credit at once-your score will begin to recover.

But it also will matter which lenders you approach for credit. Most mainstream lenders shun people who have filed for bankruptcy-sometimes just for the first few years, although sometimes for as long as the bankruptcy remains on your file.
Other lenders, though, may be willing to give you a chance. Before the credit crunch, it was fairly easy for people who filed bankruptcy to get new credit.

These days, people with a bankruptcy on their record may need more patience. Far fewer lenders cater to those with troubled credit, so rebuilding credit can take more time.

A bankruptcy filing is the single worst thing you can do to your credit score. By contrast, the current FICO formula completely ignores any reference to credit counseling that might be on your credit report. Credit counseling is treated as a neutral factor, neither helping nor harming your score.

Credit counselors, in case you’re not familiar with the term, specialize in negotiating lower interest rates and working out payment plans for debtors that might otherwise file for bankruptcy. Although credit counselors might consolidate the consumer’s bills into one monthly payment, they don’t offer loans as debt consolidators door promise to eliminate or settle debts for less than the principal amount you owe.

The fact that credit counseling itself won’t affect your score does not mean, however, that enrolling in a credit counselor’s debt management plan will leave your credit unscathed.

Some lenders will report you as late just for enrolling in a debt management plan. Their reasoning is that you’re not paying them what you originally owed, so you should have to suffer some pain.

That’s not the only way you could be reported late. Not all credit counselors are created equal, and some have been accused of withholding consumer payments that were intended for creditors. The missing payments showed up as “lates” on the consumers’ credit reports, hurting their scores.

Finally, some lenders-particularly mortgage lenders do indeed view current participation in a credit counseling program as the equivalent of a Chapter 13 bankruptcy. If they see it mentioned on a credit report, they won’t extend credit as long as the notation of credit counseling remains on the borrower’s file. But typically such notations are dropped as soon as the borrow¬er completes the repayment plan. By contrast, a Chapter 13 bankruptcy can be reported for seven years or more. (A Chapter 7 bankruptcy, which involves erasing your debts rather than retiring them with a repayment plan, stays on your report for up to ten years.)

Credit counseling isn’t something you should sign up for just because you want a lower interest rate or one place to send your payments instead of many. But, if you’re behind on your debts or able to pay only the minimums, and you want an alternative to bankruptcy, you shouldn’t stay away because of myths about its long term impact on your credit.

One simple way to improve your ratio is to redistribute your debt. If you have a big balance on one card, for example, you could transfer at least some of the debt to other cards. It’s typically better for your scores to have small balances on a number of cards than a big balance on a single card.

You also could investigate getting a personal installment loan with your local credit union or bank, and use the money to pay down your cards. Applying for the loan may ding your scores a bit, but that’s likely to be more than off¬set by the improvement to your scores from reducing the balances on your credit cards. (Credit scoring formulas are much more sensitive to the bal¬ances on revolving debt, such as credit cards, than to the balances on installment loans.)

A riskier strategy might be to take out a 401(k) loan. These loans don’t show up on your credit report, but you do face a big hazard: Ifyou lose your job, you typically have to pay the money back quickly or you’ll incur taxes and penalties on the balance. If you decide to take a 401 (k) loan, make sure you’ll be able to repay the loan quickly to minimize the risk.

Whatever you do, don’t cash out a 401(k) or withdraw money from an IRA to payoff credit card debt. A few points’ difference on your credit score is not worth the short-and long-term costs you’ll pay for a premature withdrawal.

Although moving debt around can lift your scores, the best strategy for your numbers and your finances long-term is to payoff revolving debt either out of your current income, using cash that’s sitting in a savings account, or selling stocks or other investments, so long as they aren’t in a retirement account.

Of course, as you know by now, many lenders never see your actual report. They’re just looking at your credit score, which couldn’t care less who closed a credit card. Fair Isaac figures that if a lender shuts down your account, it’s either for inactivity or because you defaulted. If you defaulted, that will be amply documented in the account’s history.

If it makes you feel better to contact the bureaus and ensure that accounts you closed are listed as “closed by consumer,” by all means do so. But it won’t make any difference to your credit score.

Now, it is true that to get the highest FICO scores, you need to have both revolving accounts, such as credit cards, and installment loans, such as a mortgage or car loan. And with the exception of those 0 percent rates used to push auto sales after September 11, most installment loans require paying interest.

But here’s a news flash: You don’t need to have the very highest score to get good credit. Any score over 720 or so is going to get you the best rates and terms with many lenders. Some, particularly auto and home equity lenders, reserve their best deals for those with scores over 760. You don’t have to have an 850, or even 800 score, to get great deals.

If you’re trying to improve a mediocre score, a small, affordable installment loan can help-provided that you can get approved for it and pay it off on time. But otherwise there’s no reason to get yourself into debt and pay interest.