The difference between the Financial Compass and Debt Settlement programs.

I was recently asked about the difference between our debt elimination program, the Financial Compass, and using a debt settlement program or a cash out refi.

We’ll first compare our program to settlement and then to the old standby method of paying down debt involving a cash out refinance for a homeowner.

Consumer programs that consolidate debt are usually a debt settlement business, and are advertising heavily on tv and radio. While they can offer a short term benefit and erase some debt, they can also damage your credit for years and could actually cost you far more in the long run than you saved in the short term. The creditors report the settlements to the credit bureaus and your credit score can drop further dramatically. And this is usually after your score has already gone down due to late payments leading up to the need for a change if you were in the position of not being able to keep up with your debt payments.

Those programs generally only deal with unsecured debt and are targeting a consumer with at least $10,000 in credit card debt. Our debt elimination program, the Financial Compass Plan, can address any kind of monthly debt that can be paid off, including your mortgage, and doesn’t harm your credit.

Now let’s say the client gets back on their feet after going through debt settlement or credit counseling and needs to use credit to buy a refrigerator , a car, or get a refinance or new mortgage. If they can qualify, they are going to get much higher rates due to their credit scores and the extra interest they pay on everything over the next several years could easily cost them more than they originally saved.

Especially in the case of a mortgage, where the higher rate could cost them tens of thousands in additional interest paid. While debt settlement or consolidation have a place, it is usually for someone who is approaching the last steps before bankruptcy. These type of programs are really for someone who is already underwater, or has negative cash flow and no hope of changing their immediate circumstances, thereby needing a solution today, and not having any other options. In some cases the straight bankruptcy is more beneficial than going through debt settlement and then bankruptcy anyways if you can’t avoid it.

The problem with debt settlement is this type of service is being aggressively marketed towards the average consumer on the radio, tv, and the internet, and many people don’t understand the true cost of these programs. Nor do they generally need them. Someone who is still cash flow even or positive has options that can turn their entire financial future around for the better. Someone who has already gone through debt settlement or consolidation may not have needed to and usually still has a significant amount of debt to pay off and possibly a mortgage too which our program can address. The Financial Compass can help protect what’s left of their credit and help them to rebuild it while putting them on the right path financially.

Now let’s look at the typical cash out refi as was done the majority of the time over the last several years in the mortgage industry who have not had additional programs like ours in the past to work with. The substandard mortgage company in the past would use as much of the client’s equity as they could to “pay off” as much of the client’s debt as possible, and would do this every time the client comes back in after having built up their debt again and again. They were not able to, and did not, give their client a lasting solution.

When asked, I’ve had a number of them tell me they told the client to take the monthly savings and pay it against their mortgage. That almost never happens in practice and the mortgage is usually the last place you want to put extra money when you have other debt incurred. But many of the untrained or inexperienced mortgage people gave poor advice which has led to many of the problems homeowners that went through a cash out refi have experienced. ( one more reason you should look for a certified mortgage planner when examining making a change in your mortgage.)

Each time a client goes through a cash out refi, the client’s equity decreases. If they continue to go through this process 2 or more times, as many have, they could eventually find that there isn’t enough equity left to help them again and they are in deep trouble and possibly on the verge of losing their home. We’ve seen this happen to many people over the last year and it looks like many more will suffer the same fate over the next couple of years as property prices continue to fall or stay at a low level.

What got the person into trouble after the cash out refi? They got used to the new mortgage payment and spending the extra cash freed up and then went on to use their newly freed up credit cards. We are called consumers for a reason.

There is another way to use a cash out that benefits everyone. When you do a cash out refi, you “pay off” some higher cost debt (usually credit card) which really transfers the debt to the lower cost mortgage debt. You used home equity to transfer that debt, but you did not pay off the debt. What we suggest is that you use as little equity as possible to pay down the debt and obtain an improvement in cash flow which can be used as the margin (overage payment) in our program. We’ll address all of the remaining debts in our program after which you can  use the cash flow freed up by eliminating the debts to pay down the mortgage or dramatically improve your retirement contributions.

When you “pay off” all of the debt in the refi the old way, the consumer gets used to the new lower monthly payment and spends the money instead of using it to improve their retirement or investing it. Plus they have just sucked a portion of their equity out of the home that could take years to rebuild. And you may be left with a loan to value (LTV) ratio that doesn’t allow you the ability to do another refi if you need one or could benefit from an improved rate change in the near future with a rate & term. You may be able to get a little payment relief on top of all this while still retaining a lot, or most, of your equity by doing things differently with your future in mind.

Using our method, you retain as much of your equity as you can which allows you to more easily qualify for another mortgage transaction if you have an emergency and gives you options you don’t have the old way. It also allows you to get used to a payment that will not only eliminate all of your debt, but allows you to more easily go on to build your retirement or other investments. Within the monthly payout (overall debt payment) in our program we’ll continuously free up more cash as we pay off each debt building up the monthly cash flow and using it to truly pay off the debts. That cash flow we free up can then be used by you to beef up your retirement after or even while we are paying off the remaining debts.

It’s very important to factor into your strategy that less than 10% of your fellow Americans are building a retirement fund that will let them retire comfortably and provide for them. It’s not enough to just go into retirement debt free, you need a lasting income too. Now also realize that in our program we will be helping you to protect and build your credit, and we’ll be improving your debt to income (dti) ratio which helps you to more easily qualify for future mortgage transactions when you need them or when it makes sense for additional savings.

So if you plan a cash out refi with your mortgage professional (look for a certified mortgage planner) talk to us about incorporating our plan and ask your mortgage planner to contact us so we can work with them to ensure that you retain as much equity as possible, actually pay off your debts, and are able to build your retirement. You also end up with more options in the future, and our program could help to protect and build your credit.

Keep in mind that you don’t need a new loan or a line of credit to get into our program. You can simply get a free analysis from us to find out how much you could save and when you could be completely out of debt. And if you want to get into our program after that, if is simple to do so.

Please send any questions you may have about our program to me at

nodebt @ fromdebttohope.com

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