With the decline in social services and the social safety net, excessive debt affects most Americans. But there are more options than people think for managing their debt and changing their circumstances. And we see these with the abuse of responsible debt practices by the wealthy, monopolist firms, and even our president, who evade payments, negotiate debt, and default strategically like a game, when so many others are told that to accept an exploitative double standard is the honorable and even Christian thing to do. So I want to share the experience of my friend Numerius Negidius.
Numerius has excellent financial practices: zero debt, maximum monthly CC payments, stable and secure income, high credit limits. Over time, this earned him a credit score near the maximum of 850. But due to serial tragedy among people in his life, Numerius acquired $40K in debt over two months, all on one credit card.
He didn’t have cash to cover the sudden cost, and didn’t want the tragedy and its burdens to hang over him for the five years it would have taken to pay off. He also saw that his credit score wasn’t doing any work. He already had the things a person needs a credit score for: a home and a car and a credit card. Being near the maximum, it wasn’t going to get any better. He concluded that his credit score should get a job.
He decided to see if he could put his credit score to work by selling it for cash, not literally, but by admitting that the debt was beyond his capacity, going into default, and settling his debt to a smaller amount. Debt settlement is when a credit card company reduces the total amount owed to recover some of the money they lent at risk. They do it, but they don’t do it lightly. It takes help. So Numerius found a debt settlement company. Debt settlement firms bundle the debt of many clients to negotiate with the credit card company, in this case a large international bank. By aggregating the debt of his debtors, and coordinating with those debtors to refuse payments, they gain leverage over the debtholder to negotiate each client’s debt down. These are distinct from others in the debt ecosystem—christian credit counselors, debt consolidation firms, and financial coaches—who can renegotiate debt interest and payments. Debt settlement companies essentially organize debtor’s strikes. In exchange they take a fee that is typically 25% of the total debt, but can be negotiated to 20% with a bit of shopping around.
The financial tool of debt settlement is reserved for people who are in distress, broadly construed. Numerius’ main difference from others was that most clients are already delinquent before they subscribe, whereas he anticipated that he was going to have to default before it happened. This meant his credit score was high going into the process.
Numerius had shopped around between a few debt settlement firms before picking the one with the best terms and reputation on the BBB website. Working with his debt settlement firm (I can ask him which debt settlement company he used if you need), he withheld payment and communication for three months until his bank came to the table with his negotiator at the debt firm. He told me thinks he might have been able to negotiate on his own, saving the large fee they charge (there are books to walk a person through the process), but he seems OK with having jobbed out this expertise. His negotiators developed a schedule renegotiating the debt principal to 50%, from about $40,000 to about $20,000. This didn’t include the fee of the debt consolidation firm, which was up to $10K.
Numerius Negidius ultimately only had to pay about $30,000 of his $40,000 debt, saving $12000. During the process, he lost about 200 points on his credit score, taking it from 835 (excellent) to 630 (fair).
One year later, Numerius is now making much smaller regular payments to his debt settlement firm on a shorter and more sustainable schedule. Due to his other responsible spending and borrowing practices, his credit is on track to bounce right back. Doing the math, his total savings amounted to (12000/200 =) $60 per credit score point, or $6000 per 100 points. He surprised me that I hadn’t heard about this, and that more people don’t do it.
Credit card companies charge interest because they are taking the risk that they won’t get their money back. It’s a real risk, particularly in a society where so many Americans are in default, and do not have the savings they would need to absorb an unexpected economic shock. Numerius saw this and went through a process to spare him paying the full amount of a debt imposed on him. This amounted to a temporary trade of 200 credit score points, which he says is steadily recovering given his otherwise small balances and absence of debt with the bank that holds his main credit and debit cards. He should be back well above 700 in the next two years.
There are other risks. A credit company could have sued Numerius for non-payment. They did not in this case though, and it is rare. Anyhow, his debt settlement firm insured him against being sued to make it more their responsibility. Another risk is being banned by the bank. This also did not happen, and he found there are lots of banks eager to earn his business. Another risk is the opportunity to commit fraud: Numerius did not go out of his way to artificially further inflate his amount owed fewer than 90 days before defaulting, which is a crime. He managed this risk by knowing the law: that debt is legal, hardship is legal, non-payment is legal, default is legal, and fraud is not. His debt firm took it on themselves to inform his of this risk, which made it a non-risk. Another risk is that the bank will fail to property note to credit score firms that his debt was settled, an issue that can be resolved with phone calls. As he went through this process, a great deal was made of each of these risks by the people he encountered, but none of these risks hit Negidius, and if they had, none of them would have been so unmanageable.
After all of this, his credit account will note for seven years that he defaulted and settled. He chose that over spending those seven years paying the debt. And in times when so many Americans face crippling medical debt, lenders are prepared to forgive such blips. He also had to count the forgiven debt as income on his taxes, which he had to plan for (and which further reduced his post settlement “discount” by $1000–$2000). And he warned me that his advice should not be taken as legal advice (and he’s not a lawyer). But overall, Numerius says he was impressed by the quality of the guidance and education and representation of his firm, and the rigor of the protections against Americans in debt. He benefitted from them greatly. And if he ever ends up this position again, he says he has the confidence to go it alone, without a firm, to see if he can negotiate down to 50% or 60% with no middle man and more money in-pocket.
I’m sharing my friend’s story because it shows that astonishing debt can happen to everyone. You have more tools than you think for managing your debt and changing your circumstances. His experience impressed me because it showed me that we have more power than we think over our debtholders, and you can make a credit card company take responsibility for the inherent risk of being a lender. This exercise will affect your credit worthiness in the short and medium terms, but the idea of credit worthiness was invented by creditors to scare people out of their rights, and to help the wealthy reduce the risk they face when profiting off of their wealthiness through the sin of usury. Credit bounces back. And when it comes down to it, a credit score, like money, should be put to work.
