06/21/2012 03:16 pm ET Updated Dec 06, 2017

A Different Take on Debt

Recently the article "Debt Management Plan Helps Couple Escape $52,000 Credit Card Debt" was published here. In that article, a lovely couple used a charitable nonprofit credit counseling agency to embark on "a grueling 54-month journey to pay off all their debt."

The article is most certainly a tribute to the kind of hard work we applaud in America. But as I read the story I had to wonder "but at what cost" to the beautiful couple and their children.

Their credit counseling repayment plan took 54 months at $1,182 a month. In total, they paid $63,828 to pay off $52,000 in credit card debt.

During that journey, "They worked extra jobs, spent the bare minimum, bought only used cars and furniture, did not take any vacations except camping trips, made no home improvements and cooked all meals at home." They also said, "Each month it was a battle. It was beans and rice."

Let's look at other alternatives they might have selected. Let's say the couple filed a chapter 7 bankruptcy instead. The chapter 7 bankruptcy would have cost less than $2,000 and their debt would have been eliminated almost instantly. If they worked just as hard they would now have about $61,828 to invest for retirement. Using conservative values, that investment would be worth about a cool half a million about 30 years from now.

As someone who answers question every day for people at, I understand the reality of bankruptcy is one many are confused about. They discount it out of a perceived stigma without evaluating the logic and math of the solution.

A debt management plan is but one tool available to deal with debt and not the single all-encompassing approach to righteously get out of debt. In fact, we haven't even discussed the reality of unsecured debt consolidation loans which are available at below bank rates from peer-to-peer lending networks.

In the United States a nonprofit credit counseling program repayment plan formula is not negotiated, it is dictated and controlled by the creditors.

So let's look at a truly negotiated alternative. Let's say the cute couple could have managed to work hard or sell some stuff to raise about half of what they owed and had come to an agreement with their creditors to repay less than they owed as payment in full.

Under a responsible debt settlement approach the couple have resolved their situation and paid 15 percent of the amount of money they saved to a full debt settlement service agency.

Estimating they were able to settle their debt for half, they could have settled the debt for $26,000 or so (not including balance increases) and paid about $4,000 in fees. So in half the time and for about half the money a debt settlement approach might have been possible. And sure, there is a credit report impact like bankruptcy and a potential for tax due from the forgiven debt but if the couple was insolvent the tax would be waived and the credit can be easily rebuilt.

All of this being said, you have to ask why credit counseling agencies don't provide a truly negotiated debt settlement approach for consumers if it is a mathematically logical way to deal with some situations where consumers can demonstrate they are appropriate for that approach and understand the associated risks. Instead they come out shouting against it.

Creditors have made it clear to credit counseling groups if they get into settling debt they will potentially be kicked out and lose funding from the creditors. And the irony, the same creditors settle debt every single day with others, including the consumer directly.

But these issues are not transparent to the consumer. Credit counseling organizations and trade groups want to keep these issues hushed. They also want to keep a secret the performance rates of the debt management program.

Should consumers even be pushed into a debt management plan over a bankruptcy, debt settlement, or debt consolidation loan without knowing the performance rates of such programs? Without that knowledge we are encouraging consumers to buy the solution blindly and that doesn't make sense. It's like buying a car without knowing the fuel milage it gets.

One of the very few credit counseling groups that does openly publish their performance figures is Cambridge Credit Counseling in Massachusetts. Cambridge has taken heat from its peers for breaking the code of silence. Its published completion results show that about 46 percent of people who enrolled in the credit counseling repayment plan in Q2 2006 have completed the program -- the success rate of other agencies is actually much, much lower. Maybe that's why they won't publish it.

The take aways here are that people should take a deep breath when they realize they are in trouble and research all of their options vigorously and without preconceived ideas. Oh yes, and we should demand more transparency and broader help from modern-day credit counseling as well.

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