As a mother, I know how heartbreaking it can be when one of your children asks you for a toy or gadget that is way beyond your already tight budget for the month. Last week I just ran into a friend from high-school, let’s call her Anna, obviously protecting her identity. Apparently, she was going through some rough times which made me listen to her confessions over a cup of hot tea.
Is money the root of all evil?
She got a divorce which shook her emotionally and financially. Anna was trying to protect her 7-year-old angel from the stress by spoiling her with anything she wanted, including a trip to Disneyland and other items that would distract the kid from asking about when is daddy coming back.
This short-term win strategy was taking a toll on her already maxed out credit cards. She got the house, but it was more than she could afford on her own. Also, she was still paying the last remains of her student loans. Long story short, things were not looking great.
Can debt relief services help?
Anna always referred to me as life savvy and a bit thrifty, and now she was asking if I thought that it would be a good idea for her to explore freedom debt relief. This service promised to help her get her money trouble in order in a couple of years, between 2 and 4 to be more accurate. She definitely checked the 5-figure debt requirement, but not so much the willingness to make small monthly deposits.
I was worried for Anna since signing up for such a financial boot-camp requires resilience and willpower. Of course, you have the “trainer” with you, but at the end of the day, it is you who must say no to coffee and bagel, no to your kid’s whining, pack lunch and put $50 aside.
Your account representative will go above and beyond to ensure you met your target since that helps them get their money as well. You only pay their commissions when you settle some debt. You get full control over your debt settlement account, and you stop paying other installments until you reach your goal.
The part I thought was really smart and motivating is that you get an app to show you the progress you made. Being the planner-girl that you know me, this part got my attention.
Once you saved all the necessary money, the agency will start negotiating settlements with your creditors. Since they promise lump-sum payments, they can get you to keep important amounts. Once a debt is settled, the agency makes sure it disappears from your credit report too.
Collection agencies will notice that you stopped paying your debts and will try to persuade you to continue paying or even threaten you. Until you get your lump amount, you will accumulate some debt and get a lower credit score. However, when you have 5 or 6-figure debt, your credit score is most likely not on the +700 side.
The money you save for repayment counts as taxable income, so better talk to a tax adviser about this situation and file accordingly.
If your creditors are zealous, they can file a court action against you while you are saving to repay them. In this case, a professional agency would offer you the services of a specialized lawyer. Still, this could really mean trouble, and you should really balance the pros and cons.
Paying debt is a long, ugly and stressful process, much like a divorce. Anna would have to gather her straight again and make the right choices for her family. I have advised her to take a trial period and first see what a reasonable amount she could save monthly is. Another advice was to bring more control to her family and set an excellent example for her daughter. I invited Anna to play the saving game, like a treasure hunt together with her baby, where each of them would have a saving target, Anna in hundreds, Susie in dollars and only indulge in some ice-cream or donuts if both of them reached the goal.