Ask an Expert: How To Deal With Senior Debt

June 3, 2021CreditBy toptierfinancial

The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.

This week’s question: My mom, age 87, has approximately $8K in credit card debt. Her only source of income is social security. What are her chances of getting a negotiated reduced repayment with the two credit card companies?

Dealing with credit card debt can be challenging for any consumer, but it’s even more confounding for senior citizens who live on a fixed income. Your mother is not alone in this situation, and she is lucky to have you looking out for her. Because seniors are increasingly becoming more financially vulnerable, creditors will likely be willing to work with you rather than risking not getting paid at all. Ultimately, the success of your negotiations will depend on multiple factors, such as the relationship your mother has with her creditors, their policies, and even how helpful the customer service representative you work with is.

Negotiating

When your mother is working out her account details with her creditors, the outcome of those interactions can be a game-changer. The first step should involve a thorough review of your mother’s overall financial situation and her repayment ability. She can have a much clearer idea of her negotiating position if she creates a budget and factors in all of her income and expenses, including the credit card payments. Once that step is complete, the conversations can take place with her creditors where details can be shared to help them better understand your mother’s situation. Once they are clear on where things stand, your mother can request that they adjust her account by reducing her interest rates and monthly payments. It also helps to ask about any hardship programs the creditors offer to determine if your mother qualifies. Assertiveness helps in these negotiations, but your mother must avoid accepting any agreement that is difficult for her to honor. If they present an offer that meets her goals, they should be asked to send the offer in writing.

Explore all the Options

Another option for your mother is to work with an NFCC Financial Counselor to explore all repayment strategies available to her. Working with a financial counselor can help determine if a Debt Management Plan (DMP) is the right strategy for her, address other financial issues beyond credit card debt, and connect her to additional resources. They can also offer appropriate guidance for negotiating with creditors.

In addition to a DMP and negotiating with the creditors, her counselor can help explore the pros and cons of debt settlement. Usually, debt settlement is a last resort move to pay off the outstanding debt by paying the creditor a lump sum and having the remainder of the debt forgiven. It can be a useful strategy to pay off debt quickly, but it may have tax consequences and a more negative effect on your mother’s credit than any other options mentioned before.

Understanding all available options will help your mother determine which strategy is best for her circumstances. Creditors will likely want to work with her, but it’s not guaranteed. So, it helps to be ready for all possibilities. It may take more than one phone call, but persistence can lead to success. And if it looks like extra help is needed, a financial counselor can always provide additional guidance for negotiating or exploring additional strategies.

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Ask an Expert: Are Debt Settlement Companies Legitimate?

March 3, 2021CreditBy toptierfinancial

The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.

This week’s question: Are any debt settlement companies legitimate? Do they have to be licensed?

The debt relief industry has been growing in recent years, and debt settlement companies, also known as debt relief or debt adjusting companies, have been a part of that growth. Debt settlement is not the right repayment strategy for everyone. It usually benefits people who are already in debt and cannot afford any other debt relief option and are trying to avoid bankruptcy. There are legitimate debt settlement companies, and in most states, licenses are required. They must abide by industry regulations that seek to protect consumers. However, working with a legitimate company can be risky and turn out to be more expensive than other repayment options.

The Risky Business of Debt Settlement

When you settle your debt, you work out an agreement with your creditor to pay off your debt for less than what you owe. Debt settlement companies manage those negotiations for you. They may even ask you to set up an escrow-like account for you to send in payments. By law, they cannot charge any upfront fees and have to clearly inform you about all fees and payments. But, if you make just one payment under one of their settlement agreements, you may be on the hook for all fees related to the program, even if you have not paid off all your debts.

Debt settlement agencies cannot guarantee the outcome of a negotiation. In fact, your creditor may refuse their offers. And if you stop making payments on your debts while working with a debt settlement company, which is what some debt settlement companies advise, you will start accruing late fees and interest and could even face collections or a lawsuit. All that, in addition to a dramatic negative impact on your credit.

Another thing to keep in mind is that any forgiven debt greater than $600 is considered taxable income. So, be prepared to receive a 1099-C form to file with your taxes if your forgiven debt meets that criteria. When you add the company fees and any potential taxes, a debt settlement may not be saving you as much as you would have hoped.

Your Debt Relief Alternatives

Depending on how much you owe and your current status with your creditors, you may have other debt relief options. You can try nonprofit credit counseling as a way to connect with a financial counselor who can review your situation and offer free or low-cost advice to help you create a debt repayment strategy. Another option is to settle your own debt, working directly with each creditor. It may take time and often more than one call, but you can contact your creditors and offer reduced payments. Be sure to offer payments that you know you can afford and always get any new agreements in writing.

Choose Wisely

If you decide to let a third-party debt settlement company handle the situation for you, make sure you work with a reputable institution. Do your research and look for reviews and complaints online about the company you plan to work with. Check with the Better Business Bureaus and contact your state attorney general and consumer protection agencies like CFPB to determine if there are any complaints or enforcement actions against the company. They can also help you find out if the company is allowed to operate in your state and meet the license requirements. Be aware of red flags such as upfront payments and a failure to disclose fees.

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Ask an Expert: Should I Pay My Relative’s Debt?

January 23, 2021CreditBy toptierfinancial

The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.

This week’s question: Should I pay my relative’s debt?

A relative is way behind in paying off credit card debt.  They owe about $20,000.00 across 18 credit cards and wants me to pay it all off, with a promise of paying me back over several years. Can you help settle with 18 credit card companies? Would this arrangement be made in writing, so there is no misunderstanding and there are no follow-up collection efforts?  Would the interest each credit card company foregoes be considered as income to be reported on my relative’s tax return, with taxes to be paid?

Helping Relatives can be Risky

We commend you for helping your relative get out of debt. It’s often overwhelming and confusing to find ways to manage debt effectively, especially for the elderly. Paying off your relative’s debt and expecting he’ll repay you with interest is often a risky scenario for more reasons than one. With limited income, it will become increasingly difficult for them to pay you back, and if your relative continues to use the newly paid-off cards, they may struggle once again with unmanageable levels of debt.

Explore Other Debt Relief Options

The good news is that there are other options to manage their debts, including your debt settlement suggestion. A debt settlement is an agreement between the creditor and the borrower to pay a debt for less than it’s owed and consider the debt as satisfied. Credi tors are not required to offer this kind of deal, and it’s usually challenging to do so if the accounts are current, but it’s not impossible. If you were to negotiate with creditors on your relative’s behalf, make sure to get all the settlement agreements in writing before sending any payments.

At the NFCC, we connect you with certified financial counselors who can help your relative manage his debt through personalized plans and programs through counseling sessions, which are often free of charge. However, our affiliated counselors do not negotiate debt settlements on behalf of others. There are for-profit debt settlement companies that promote debt negotiation programs, but there are numerous consumer advisories that caution against falling into the wrong hands when hiring a company to settle your debt. Debt settlement companies often ask borrowers to stop credit card payments and send their payments to them. This puts borrowers in a risky position, you may be defaulting in your payments and sending your cash to someone else without any guarantees that a creditor will accept an agreement. So, you will be dealing with collectors and out of cash. And, just like you mentioned, debt settlements can have fiscal consequences. Any forgiven debt greater than $600 is considered as taxable income.

Talk to a NFCC Certified Financial Counselor for Safe Recommendations

I suggest that you and your relative talk to an NFCC Certified Financial Counselor before you make a decision. Even if you live hundreds of miles away, you can all schedule a call with a financial counselor and explore your relative’s options. The counselor will start by reviewing your relative’s income and overall situation to determine what options are best for him. His options can include self-repayment strategies, which you could help him set up and manage, or even a Debt Management Plan (DMP). If a DMP is the right debt repayment strategy for your relative, it will offer him an easy way to consolidate his monthly payments in just one, typically with a lower monthly payment. His accounts will all be credited and paid in full and he can benefit from reduced interest rates and waived fees. This program is also an agreement between the creditors and the borrower through a nonprofit managing the plan. Creditors have preexisting relationships with creditors which makes their cooperation more likely.

With your support and a counselor’s guidance, your relative can implement a debt repayment strategy that won’t require you to spend $20,000, hefty fees to implement, and that will help him deal with the situation effectively. He is very fortunate to count on someone like you—best of luck to both.

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Debt Settlement: How Its Works + Pros and Cons

November 25, 2020CreditBy toptierfinancial

Have you gotten an offer to pay off credit card debt for less than the total amount due?

This may seem like a gift. Settling $6,000 of credit card debt for $4,000, for example, leaves you with $2,000 you didn’t have to pay.

Instead of staying in perpetual debt, making monthly payments until the end of time, you can see a light at the end of the tunnel.

Or so you think.

While the debt may be gone and the collection calls may stop, settled debt can create other problems.

These problems include higher taxes, a big hit to your credit score for years, and having to come up with the money to pay the debt off in a lump sum.

For many people, the promises of debt settlement offers really are too good to be true.

Table of Contents:

How Debt Settlement Works
Negotiating a Debt Settlement
Using a Debt Settlement Company
DIY Debt Settlement
Is Debt Settlement a Good Idea?
How Much Does Settled Debt Affect Your Credit?
Debt Settlement Isn’t For Everyone

How Debt Settlement Works

In a debt settlement, a creditor agrees to reduce the principal amount you owe if you pay a lump sum that’s less than the full amount you owe. The lump sum can range from 40 to 80 percent of your balance.

Debt settlement offers can be initiated in several ways:

By a Credit Card Company: If you have a large amount of unsecured debt with a credit card company and have fallen behind on your monthly payments, you may get a letter from the company offering to settle the debt.
By a Collection Agency: If you’ve fallen way behind or defaulted on an account, the original creditor may have sold your debt to a collection agency. The agency could propose a deal.
By a Debt Settlement Company: If you’ve hired a debt settlement company to help you get out of debt, the company may hammer out deals with your credit card companies as part of a debt consolidation plan.
By You Directly: You could propose a plan yourself by contacting the credit card company directly. Be sure to get the agreement in writing before sending in money.

Debt settlement will work only with unsecured debt such as credit cards, personal loans, and other bills that have gone into collections.

If you’re behind on your mortgage or auto loan, you’re not going to be able to settle because a car can be repossessed and a house can be foreclosed on. Debt settlement also will not work with student loans in most cases.

Why Would Creditors Accept Debt Settlements?

Two situations could motivate your creditor to propose (or agree to) a settlement offer:

If you’ve missed monthly payments for several months.
If you are delinquent on the account.

If the company believes you can afford your payments, it’ll be less likely to settle.

However, if the company believes you may enter Chapter 7 bankruptcy, it will be more likely to propose or agree to a debt settlement agreement. Since credit card debt is unsecured, creditors wouldn’t get any money if you entered this kind of bankruptcy.

At least with a debt settlement, your creditor could recover part of the money you owe.

Can A Debt Settlement Offer Be Negotiated?

If you get a debt settlement offer, know that you can negotiate for a better deal. You can also contact your creditor first and ask for a settlement, or you can hire a lawyer or debt settlement company to seek debt collection settlements for you.

When you negotiate, let the creditor know about financial hardships you’re facing. If you have huge medical bills or just lost your job and have no income, your creditor or debt collector should know.

If a debt collector knows you can’t pay many of your bills, and that an old credit card bill with a sky high interest rate isn’t high on your priority list, you can get a better deal.

Paid In Full vs. Settled

If a creditor won’t drop to a lower payoff and you pay the sum they propose, ask to have your credit report show your debt as “paid in full” instead of “settled.” Settled debt can hurt your credit score for years.

Conduct your entire debt settlement process in writing. Get all of the details in writing, such as the payment amount and due date. Don’t send any money until you get the offer in writing and have reviewed it, possibly with a lawyer. It’s a binding contract and you should read the terms carefully.

Debt Settlement Companies

The do it yourself approach to debt settlement takes time and expertise. You could get professional help with your debt settlement process by hiring a debt settlement company to negotiate on your behalf.

Instead of paying your credit card issuer, you pay the debt settlement company directly an agreed-upon amount each month and the company pays your creditor after reaching a settlement agreement.

This strategy isn’t for everyone. It can get expensive, and your credit score could hit rock bottom. For many consumers, hiring a debt settlement company should be a last resort.

Pros & Cons of Debt Settlement Companies
Pros

They know how to negotiate with creditors.
By law, they can’t charge upfront fees.
They will probably be more successful at negotiating than you.

Cons

Your credit score will tank because you stop making payments.
Collectors won’t stop making collection calls in the meantime.
You’ll have to pay the debt settlement company 15% to 25% of your debt relief.

Debt Settlement Scams

You should also be aware that some of these companies have been found to be scams, or at least not totally honest with consumers.

The Consumer Financial Protection Agency filed a lawsuit in 2017 against Freedom Debt Relief, the nation’s largest debt settlement services provider. The lawsuit accuses Freedom of charging consumers without settling their debts as promised, makes customers negotiate their own settlements, and misleading them about fees.

Some debt settlement companies may insist you use an intermediary, when in fact you can contact a creditor yourself to settle.

Some of these companies advise people to stop paying on active accounts and to stop speaking with their creditors. Withholding payments to save up for a settlement can lead to interest and penalties.

Advance payment may be required by some debt settlement companies. The Federal Trade Commission (FTC) forbids this and only allows money to be collected once a debt is lowered or settled.

Do-It-Yourself Debt Settlement

When you have one or two delinquent accounts, I recommend handling your own debt negotiations. Just call the credit card company and ask about debt relief options.

You could ask for a lower interest rate, ask to skip a payment if that’s helpful, or you could ask to have late fees waived and punitive interest rate hikes rescinded.

Or, you could propose a lump sum payment in exchange for reporting the account paid in full to the credit bureaus. It never hurts to ask for the very best settlement plan for you.

And if your credit score still qualifies you for a new account, consider getting a balance transfer card to consolidate other accounts.

Don’t be nervous about settling with creditors. The most important thing is to have enough money in your savings account to pay a reasonable lump sum payment.

Be sure to ask your creditor to remove the negative entry from your credit report in exchange for your lump sum payment.

I’ll say it again: Get your debt settlement agreement writing before paying anything!

Pros & Cons of DIY Debt Settlement
Pros

Lessens the negative impact on your credit score.
No additional fees.
You can negotiate the removal of negative entries on your credit report.

Cons

You have to negotiate the settlement yourself which takes time and effort.
You probably have less experience negotiating with creditors than debt settlement companies.

Is Debt Settlement a Good Idea?

If you’re happy with a debt settlement offer you’ve received, then you may want to proceed.

But be aware of the downsides before you agree to the terms:

Forgiven Debt is Taxable Income

The Internal Revenue Service considers forgiven debt of $600 or more taxable income. If you owe $6,000 but agree to pay only $4,000, you’ll need to pay income tax on the $2,000 of debt relief.

An extra two grand in taxable income isn’t such a huge deal, but if you’re getting $20,000 or $30,000 in debt relief in one year, you could wipe out a chunk of your IRS tax refund. Then, you may owe even more on your state tax return.

Settled Debt Wrecks Credit Scores

Your credit score could continue to fall after a debt settlement agreement. Paying less than the original amount of debt will be reported to the credit bureaus as a debt settlement, which can stay on your credit report for up to seven years.

While a settlement is better for a credit score than having an account reported as unpaid, it’s almost as bad as having a bankruptcy.

Many debt relief companies want you to stop making monthly payments while they negotiate. They want the money you’d use on payments to finance a separate account they’d use to settle your debt. Trouble is, all the late payments and missed payments will also hurt your credit score for years to come.

The Lump Sum Payment

Sure you’re not having to pay the full amount, and that’s great. But the amount of debt you do pay will be due in one lump sum payment.

Let’s use our earlier example of $6,000 in total debt being negotiated down to $4,000. You’d have to come up with $4,000 in cash which isn’t easy, especially when you’re in debt!

You could ask for a payment plan, but few creditors agree to this. Even when they do, they’d probably want four payments of $1,000 — still not an easy chunk of change to cough up.

Debt Settlement Companies Have High Fees

If you’re working with a debt settlement company, expect to pay fees equal to 15% to 25% of the amount of debt settled. For $2,000 in debt relief, you’d owe $350 to $500 in fees.

The Scam Factor

People who shop for debt settlement programs are often at the end of their ropes. Unfortunately, some debt relief services take advantage of people in dire financial situations.

Before signing up with any debt settlement company, check with your state’s attorney general’s office about complaints. You can check with the Consumer Financial Protection Bureau or the Better Business Bureau too.

These red flags can be signs of a scam:

Wrong Types of Debt: If a company says it can help with secured debt such as a car loan or with a student loan, know that the company isn’t being honest. An auto lender would simply repossess your vehicle.
Too Good to Be True: If a debt management company says it can settle your debts for pennies on the dollar, walk away immediately.
Requests for Information: A legit debt settlement company or credit counseling service doesn’t need your bank account number. It should set up an escrow account both parties can access.

Bankruptcy May Be A Better Option

Debt settlement may be your last resort if you’re facing hardship and debt you can’t possibly repay.

Chapter 7 Bankruptcy may be a better way out. Bankruptcy could provide debt relief and let you start rebuilding your financial life right away.

Bankruptcy can stay on your credit report for 10 years, and you may still need to make payments toward your debt.

Nonprofit Organizations Can Also Help

The National Foundation for Credit Counseling could help you talk through your debt relief options.

A lot of consumers prefer this method since they know a debt settlement company seeks to make a profit from their debt management plans.

Nonprofits like the NFCC can help you create a debt management plan which considers your entire financial picture.

Nonprofits typically can’t take action for you, but a credit counselor could help you figure out what action to take.

How Much Does Debt Settlement Affect Your Credit Score?

Settled debt could knock 100 points off your credit score right off the bat. That’s a big hit. The blemishes could last up to seven years, but over time the impact should slowly diminish.

But you have to consider other factors, too.

Late Payments or Missed Payments: While you negotiate a debt settlement — or while a debt settlement company negotiates on your behalf — you could be piling up missed or late payments. These will affect your credit score.
Closed Accounts: If closing your credit card account is part of the debt settlement, the closed accounts could also hurt your credit picture. Part of your credit score comes from the amount of credit you have available.
Doubly Bad: If a collection agency has bought your debt, it could appear on your credit score twice: once through the debt collector and once through the original creditor.

How Long Does It Take to Improve Your Credit Score After Debt Settlement?

Eventually, your credit score should recover from the trauma of debt settlement and its associated derogatory credit marks. But your credit score may get worse before it gets better.

For the first three or four months after a debt settlement agreement, expect to see only bad news when you check your credit report. Over time, things will settle down. Assuming you don’t make new mistakes in borrowing, you could start to see an improvement within a year.

But for three or four years expect to have a hard time borrowing money. After that, your smart credit decisions will start to balance out your older mistakes. At that point, you’re on the road to recovery.

As I said above, you can speed up this process of recovery by getting your creditor to report “paid in full” instead of “settled debt” on your credit report. When you’re making a lump-sum payment, get this agreement in writing before sending a payment.

Debt Settlement Isn’t for Everyone

Debt settlement plans could reduce the total amount of credit card debt. On the surface reducing your total amount of debt makes a lot of sense.

But debt settlement can have negative consequences:

Your credit score will get worse before it gets better.
Lump sum payments can deplete your savings account.
The IRS will charge income tax on debt relief of $600 or more.
A debt settlement company will charge high fees for its help.

That’s why I consider debt settlement a last resort. Try these options first:

Credit counseling: Nonprofit organizations can help you gain perspective.
Balance transfers: If your credit score is strong enough, try to transfer your credit card debt to a new card with lower interest rates.
Consolidation: A debt consolidation loan could also provide debt relief.

Who Should Consider Debt Settlement Offers?

The best candidate for debt settlement is a consumer who faces a large amount of debt that’s unsecured. If the consumer isn’t concerned about a damaged credit score and can come up with cash for lump sum payments, debt settlement can save some money.

As always, before sending a payment, get your agreement in writing, and try to make your payment contingent upon the creditor removing negative information from your credit report.

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How to Get Out of Credit Card Debt Without Paying Everything You Owe

October 18, 2020CreditBy toptierfinancial

Debt is tough. Sometimes it is hard to imagine getting out of it, and you can feel like your back is against the wall. One idea, that sounds good in theory, is to somehow get out of debt without paying it all off. Of course, this is an appealing strategy, but pursuing it can cause more harm than good. Here are the ways you can technically pay off debt without paying everything you owe, along with important reasons to consider other options instead.

Background

In this article, we are talking specifically about credit card debt. There are other types of debt that have “forgiveness” options, such as student loans. However, there are not typically formal “forgiveness” options through major credit card companies. When you use your credit cards, creditors have the full expectation that you will repay the money. After long periods of missed payments, your creditors may lower these expectations and charge-off the accounts and send them to collections. After this period, there may be opportunities to pursue alternative payment arrangements for less than what you owe. However, these always accompany damage to your credit score.

Settlement

Debt settlement is an agreement with a creditor to pay less than what you owe but still have the debt considered satisfied. There are two general types of debt settlement. The first is debt settlement that you negotiate on your own. We call this “DIY debt settlement.” The second type is a professional debt settlement. In a professional settlement, you work with a settlement firm that manages your debt reduction strategy.

Unfortunately, professional debt settlement is an extremely risky option that rarely works out in your favor. There are two reasons why you should avoid this option at all costs, no matter how good it may sound. First, you can cause significant damage to your credit score when you work with a debt settlement firm. Debt settlement revolves around a scheme in which you avoid paying creditors and you send payments to the settlement firm instead. Settlement firms claim that your lack of payment gives them negotiating leverage with creditors, and they are able to offer lump-sum payoffs to the creditors from the money you have been sending them. However, not only does this rarely work (more on that in a moment), but it wreaks havoc on your credit score. You will rack up delinquencies and other negative marks if you follow the scheme. Even if your settlement is successful, that will cause more credit score damage because settled accounts are listed on your credit report.

Second, debt settlement has a very low success rate. So not only can your credit take a beating, but it may take a hit without you ever seeing the purported benefits of actually settling your debts. Studies have shown that most debt settlement clients do not settle half of their debts, even years into the debt settlement process. Very few people are ever able to settle all of their debts when working with a settlement firm.

Debt settlement is not cheap, either. You can expect to pay fees between 15 and 25 percent of the enrolled debt. On top of that, if your debt is forgiven then the forgiven amount is treated as taxable income!

As you can see, while settlement sounds like a good shortcut it can create significant headache, expense, and credit damage, and it may leave you much worse off than you were before.

What about DIY settlement?

While working with a firm to achieve a debt settlement has many drawbacks, negotiating a settlement on your own can be a more viable and safe alternative. However, it is not perfect and only makes sense in a few situations. To achieve DIY debt settlement, you would contact your creditor and negotiate a lump sum payment for less than you owe that the creditor would accept in exchange for considering the account satisfied. If you reach such an agreement with a creditor, you must get the terms in writing. Otherwise, you risk paying a lump sum without being able to prove that the creditor agreed to accept it as a settlement.

DIY settlement can be difficult to achieve before your account is charged off by the creditor. Creditors just do not have much incentive or interest in accepting a settlement offer until you are very far behind. By that point, your credit score will likely have taken a pretty big hit. Additionally, a settlement you negotiate on your own can still be reported to the bureaus. Therefore, while DIY settlement is safer than working with a fly-by-night settlement firm, it does have many of the same drawbacks. The main advantage is that you can avoid the fees charged by a firm.

Bankruptcy

Another debt relief strategy that may provide for partial debt forgiveness is bankruptcy. There are several different types of bankruptcy, but individuals usually file for Chapter 7 or Chapter 13 bankruptcy. Whether you can file for Chapter 7 or Chapter 13 depends on your income and whether you qualify for Chapter 7 under the “means test.” Chapter 7 bankruptcy is a fairly quick process and can wipe out your unsecured debts through what is called a “discharge.” Chapter 13 bankruptcy can also provide for a discharge, but typically only after you complete a repayment plan, which takes three to five years.

Bankruptcy can cause major credit damage. The lead up to bankruptcy will create significant harm, but even the bankruptcy itself will be reported to the credit bureaus. Chapter 7 bankruptcy remains on your credit report for 10 years, while Chapter 13 remains for seven years.

For some, bankruptcy is the best option for moving forward. In fact, the NFCC provides guidance related to bankruptcy through two forms of counseling that are required by law as part of the bankruptcy process. Particularly if you are eligible for Chapter 7 bankruptcy, it may be your best option moving forward. However, it is a very serious decision with long-term consequences and should always be thought of as a last resort. Those who are not eligible for Chapter 7 may find that there are more favorable alternatives to bankruptcy that will create less long-term harm.

Better Options

There are better options than debt settlement and bankruptcy. If you are struggling to make your payments then you may benefit from changing the terms of what you owe rather than attempting to pay less than your full balance.

Consolidating or refinancing your credit card debt is one way to make it cheaper. You could roll your debt into a new account with a lower interest rate which, could make your payments cheaper and accelerate your repayment. However, if your credit score is not very good then you likely will not qualify for good rates, and this method will not make financial sense for you. Do not fall for the trap of a “consolidation loan” with terrible terms that really does not make you better off.

For most people, a debt management plan may be the best option. This program provides for a structured repayment plan to pay off everything you owe under the direction of, and with the help of, a credit counselor. Typically, debts on the plan qualify for waived fees and reduced interest rates, which means that the plan provides many of the same benefits as consolidation while still being a viable option for people with less than stellar credit.

Recap

Paying less than what you owe sounds like a great solution when you are in debt. But the methods that can turn this dream into reality have very serious negative consequences. If bankruptcy is the best way forward for you, then should certainly pursue it. Just remember that it is a last resort, and you will want to consider other options first. Debt settlement, on the other hand, is seldom a good idea. If you can negotiate a settlement on a debt that is already overdue then that may be a good solution. But you should stay away from professional debt settlement firms at all costs.

If you can’t have any debt forgiven, you can still receive helpful modifications, such as lower interest rates. Alternatives like this can make your debt load easier to manage without harming your credit score to the same extent as settlement and bankruptcy. If you would like help reviewing your options and making a plan to move forward, you can contact a credit counselor for free assistance.

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Ask an Expert: I’m being sued by a debt collector. What should I do?

June 30, 2020CreditBy toptierfinancial

Q. I received papers that I am being sued by a third party company I know not to ignore it, but I dont know what to say or do.

Dear Reader,

You are right not to ignore the lawsuit notification. Ignoring a suit could lead to a default judgment by the court. This usually means that a judge can grant your debt collector the right to garnish your wages or levy your bank account by default. You also lose the ability to dispute the debt.

The first thing you have to do is prepare to respond to the lawsuit within the specified time frame. It’s not always easy to do this on your own, so you may want to consult an attorney for assistance. Attorneys usually offer free consultations, and if you are low-income, you can get low cost or free help through your local Legal Aid. An attorney could help you write a formal defense, file it with the court clerk, help you identify if you have a valid defense, and, most importantly, represent you in court if it were necessary.

You must gather all information related to this particular debt. This can include collection letters, the dates when you missed your payments, and details about the original debt. You need to determine who the creditor is and if the collection information is accurate. Often, debts are repeatedly sold from one collector to another, which leads to mistakes. You must determine if the debt has passed the statute of limitations. The statute of limitations is the time established by your state in which a creditor can sue you for an unpaid debt. The collector cannot sue you once that time passes, but they can still try to collect from you.

If you owe the debt, contact the collector before your hearing and attempt to negotiate a repayment plan. If you don’t have enough income to commit to a monthly payment, you can ask for a debt settlement in which you’ll pay your collector less than what you owe. Whatever agreement you negotiate, make sure you get it in writing before you send any payments. If you cannot pay your debt at all, bankruptcy may be an option to consider. However, this is typically a last resort for consumers who have high credit card debt and won’t benefit from other debt repayment options.

If you owe the debt, but believe you shouldn’t be required to repay it, work with an attorney so you get the right guidance to defend yourself. If you don’t owe the debt, you still have to take action. The collector has the burden of proof and needs to show in court that you owe it. If they can’t produce the information, there’s a good chance that your case could be dismissed. Also, being sued for a debt that you don’t owe could be a sign of identity theft. Check your credit reports to make sure it’s error-free and that you recognize all listed accounts. You can get free copies of your credit report every week until April 2021 at www.annualcreditreport.com. After that, free reports will be available on an annual basis.

Time is not on your side. If you still need guidance to submit your response right away, talk to an NFCC certified credit counselor. You can work with a counselor online or over the phone. Your counselor can help you put your thoughts in order and guide you step by step in crafting your answer. You are taking the right steps to handle the situation and the extra help will help you deal with your collectors and the court process with more confidence. You are not alone. Good luck!

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How to Negotiate Debt Settlement on Your Own and the Impact to Your Credit Score

June 24, 2020CreditBy toptierfinancial

If you have significant unsecured debt, you may be considering various repayment strategies. Debt settlement is an option that often looks attractive at first glance but can actually be much more problematic than it first appears. This is especially true in the case of “professional” debt settlement—an arrangement that involves working with a debt settlement firm that negotiates with your creditors on your behalf. This can be a very expensive endeavor, take many years to complete, leave some of your accounts unresolved, and wreak havoc on your credit score. However, there is a different type of debt settlement, which some people refer to as “do-it-yourself” or “DIY” settlement. This has some advantages over professional settlement, but still has drawbacks. Let’s take a closer look.

When and Why Should You Consider DIY?

DIY debt settlement may be a better alternative to professional debt settlement. But, that is not saying much, since debt settlement is perhaps the least effective and least reliable method of debt repayment. You should probably only consider DIY settlement if you are already delinquent on your accounts. It would not be wise to intentionally become delinquent in order to pursue debt settlement, because a debt management plan would likely be a much better option. You might also consider DIY settlement when you have a small number of accounts to resolve. For example, if you are just trying to manage one difficult debt—say a hefty medical bill—then DIY settlement might make sense.

If you decide to pursue settlement, there are several reasons why you may opt for a DIY approach. We have previously documented the extensive issues with professional debt settlement. Consumers pursuing that option should expect to pay fees amounting to 15 to 25 percent of the enrolled debt. They should plan on the process taking three to four years. They should anticipate that some (if not most) of their accounts will not be settled, and they should know that forgiven debt will be taxed. On top of all this, we predict that most professional debt settlement clients will see their credit score drop by more than 100 points.

Taking a DIY approach may avoid some of these issues.

How to Do It

If you pursue DIY settlement, these are the steps to take.

Research First

The first step you should take is to research your creditor and any policies they may have regarding debt settlement. You can find online forums where other consumers discuss how they have handled settlement negotiations with specific creditors in the past. You may also find information from the creditor directly. Do this research to get a sense of what your creditor might agree to.

Save Up Cash

You may maximize your negotiating leverage by stocking up on cash. Most creditors will want to see an offer of a large lump sum. NerdWallet reports that you should generally expect to be able to settle with an offer of 40 to 50 percent of the balance, so that is probably a good goal to have in mind.

Some creditors may be open to a settlement payment plan instead of a lump sum. However, you should think very carefully before considering that approach. Depending on the terms of the payment plan, your agreement could terminate if you miss a single payment.

Prepare Your Offer

You know that realistically you can expect to settle at around 40 to 50 percent of the balance. So, your initial offer to the creditor should be quite a bit lower in order to leave room for negotiating. Come up with an initial lump sum offer and call your creditor. You may need to speak with a manager, or call back multiple times until you reach a helpful representative. Based on your research, you may find that your creditor has a specific “financial relief” division, so you will want to be sure to call that department to increase your chance of success. Remember, there is no guarantee that your creditor will agree to any settlement offer.

Get It in Writing

Once you have a verbal agreement with your creditor, you must ensure that the deal is put in writing. This writing will provide proof of the arrangement should any issues arise later. The last thing you want is to hand over a large lump sum only to have the creditor claim that they never agreed to treat that as a full settlement.

Make Your Payment(s)

Of course, the last step is to hold up your end of the bargain. Make your payment(s) promptly and in accordance with your agreement. Make sure that the creditor receives the payment(s) and holds up its end of the deal. From there, keep an eye on your credit report to ensure the account’s new status is reported correctly.

Credit Score Impact and Taxes

The steps detailed above can allow you to bypass many of the pitfalls associated with professional debt settlement, but not all of them. The main pros of the DIY approach are that the process can move more quickly, and that it can be much more affordable since you won’t pay any fees to a firm. However, there are still cons.

The major con is damage to your credit score. Every additional missed payment to your creditor hurts your credit score. So, if it takes you a few months to save up for a lump sum payment, your score may take a beating in the meantime. On top of this, settling a debt is always more damaging to your credit than paying a balance in full. As Experian explains, settling a debt (even with the DIY method) leads to the debt being reported as “settled” or “account paid in full for less than the full balance” on your credit report. These are considered negative marks and will remain on your report for seven years from the delinquency date.

Lastly, while you will not have to worry about paying fees to a settlement firm, you will still have to worry about the IRS. Forgiven debt is considered taxable income. Once you factor in this expense, your settlement will not be as good of a deal as it initially appeared. If you saved up a load of cash for a lump sum payment, you may need to turn around and start saving another lump sum—this time for a tax bill.

Worth It?

DIY debt settlement definitely has some advantages over working with a professional debt settlement firm. That does not mean that it is a good idea, though. Many consumers would be much better offer with credit counseling or another method of repayment. DIY settlement is best for those with a very small number of accounts. Still, those that pursue this option should prepare for significant credit score damage, tax liability, and the potential that their settlement efforts will not be successful.

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Ask an Expert: Is there anything I can do to fix accounts I settled in the past to help my credit so I can buy a house?

May 30, 2020CreditBy toptierfinancial

Question: I fell behind on credit card payments four years ago and settled a couple accounts for less than the full amount a little over 3 years ago, which I know now was not the wisest decision. My financial situation is much different today than it was but my credit score is still hurting. Is there any way to rectify these accounts and remove them? If I call the credit card companies, will they allow me to pay the amount that they wrote off in the settlement and change the status or am I stuck for four more years waiting in credit score limbo?

Dear Reader,

I understand your frustration. While you can’t change the past, you can focus on “actively” working to improve your score today and in the future.

Your credit report is a record of your monthly financial activity. So, you have the power to influence your score each month. To see your score improve, you will need a strategy, discipline, and patience because it takes time to see the results. The first step is to see what’s on your credit report to determine what you need to work on. Instead of relying on data from a simulation software, get copies of your actual reports. You can get free copies from each of the leading credit bureaus–Equifax, Experian, and TransUnion–from annualcreditreport.com every 12 months. If you want to know your score, you can purchase it directly from the credit bureaus, FICO, or get them free of charge from a reliable third party.

When you get your reports, review them carefully, and correct any mistakes if you find any. From what you tell me, it looks like your settled debts may be keeping your score down. Unfortunately, removing those accounts before they are scheduled to drop off is very difficult. In some cases, collectors offer to delete the collections or report settled debts as paid in full when they are trying to collect payment. Yet, the rules of credit reporting don’t always make it possible for those arrangements to succeed. Legally, credit bureaus have to report this information for up to seven years after the first delinquency was reported. Otherwise, collection accounts would be deleted regularly, resulting in inaccurate credit histories for many people.

In your situation, try asking creditors for a goodwill deletion. You can send them a letter appealing to their good nature instead of offering to pay the amount they already forgave. When you settled your accounts, your creditors agreed to consider that debt satisfied. Additional payments won’t improve your score; if anything, bringing old collections current may reset the clock on those accounts.

Assuming that you have positive credit activity every month on your credit report, the negative effect of your collections should be diminishing with time. Your credit reports prioritize current information over the old, so it’s critical you manage your credit effectively. If you haven’t, it’s time to do so. In general, having a good credit report includes maintaining a mix of credit cards and loans, paying on time, using 30% or less of your available credit in each card, and asking for new credit sparingly.

Without details about what’s on your credit report, it’s difficult to give you specific recommendations. You can always talk to an NFCC certified financial counselor to get personalized guidance. Your counselor will review your credit report and overall financial situation to help you find the right strategy to improve your score and get you mortgage-ready. You are already on the right track. Good luck!

Sincerely,

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

 

 

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AskanExpert: Should I Pay Off a Debt in Collections and Will it Help My Credit?

May 9, 2020CreditBy toptierfinancial

Question: I have two debts I owe, each for about $200.One is a phone bill and the other from a water service company. Both debts have been sold to a collection agency. Should I pay both? One gave me an offer settle for less and they will clear it, but should I do that or should I pay in full? Will it help fix my credit or not? I just read not to give a collection agency any of my bank info. What kind of proof of payment should I get and what is the best method to pay?

 

Dear Reader,

Paying your debts in full is always the best way to go if you have the money. The debts won’t just go away, and collectors can be very persistent trying to collect those debts. Before you make any payments, you need to verify that your debts and debt collectors are legitimate. You should ask both collection agencies for a written debt validation. Under the Fair Debt Collection Practices Act, you are granted protections against collectors, so it’s important that you keep track of your communications with the collectors in writing. Under the law, the collection agency has to verify your debt within 30 days. This letter should include information about the original debt. If the collector fails to provide you with this verification, they can’t legally collect that debt or report it to the credit bureaus. If they validate the debt, then you should plan your repayment strategy.

If you want to accept the collector’s offer and settle for less instead of the full amount, get the offer in writing and make sure it clearly states their commitment to remove the collection account from your credit reports as soon as the debt is settled. It’s a good idea to ask collectors to include a “pay for delete” incentive when you are paying off a debt because it can help you boost your credit score as soon as the account is removed. Collectors are not required to agree to it, and many don’t even offer it, but it’s worth a try. If you are settling your debt, at least try to get them to report your debt as “paid in full” rather than “settled for less than the full balance.” Having your collections listed as paid in full in your credit report is more favorable than having your debts paid for a fraction of what you owed. So, in your case, if the collector is offering to remove the debt with a partial payment, settling the debt should not have a negative effect on your credit.

When it comes to making your payment, your best options are cashier checks or money orders. As a general rule, it is a safe decision not to share your banking or debit card information with collectors. Providing that information leaves you potentially vulnerable to having additional funds withdrawn with little notice, either by mistake or intentionally. Whatever form of payment you choose, make sure you can keep track of it. After you pay, check your credit reports to verify that the collectors have upheld your agreement. Your credit report is updated monthly, so make sure you give yourself enough time. Until April of 2021, you can get free copies of your credit reports once a week at Annualcreditreport.com. Beyond that, your credit reports will be available once every 12 months at no cost.

Paying your debts in full is a great way to begin rebuilding your credit, and you should see an increase in your score over time if you practice healthy financial habits. However, how that journey plays out depends largely on your current credit history. If you want to focus on learning how to rebuild your credit, don’t hesitate to look for help. There are plenty of resources online, and if you would like a more personalized approach, you can always talk to a certified credit counselor from a nonprofit agency over the phone or online. Good luck!

Sincerely, 

Bruce McClary, Vice President of Communications

Bruce McClary is the Vice President of Communications for the National Foundation for Credit Counseling® (NFCC®). Based in Washington, D.C., he provides marketing and media relations support for the NFCC and its member agencies serving all 50 states and Puerto Rico. Bruce is considered a subject matter expert and interfaces with the national media, serving as a primary representative for the organization. He has been a featured financial expert for the nation’s top news outlets, including USA Today, MSNBC, NBC News, The New York Times, the Wall Street Journal, CNN, MarketWatch, Fox Business, and hundreds of local media outlets from coast to coast.

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The Debt Relief Industry is the Wild West, NFCC featured on “What’s Working in Washington” Podcast

February 9, 2020CreditBy toptierfinancial

Our own Bruce McClary, VP of Marketing and Rebecca Steele, CEO joined Richard Levick on the ‘What’s Working in Washington’ podcast to talk about about consumer debt and the increasing problems consumers are facing when trying to find help. Consumer unsecured debt continues to rise and is currently sitting at $1.5 Trillion. 

Rebecca Steeles says, “The first step is always the hardest to take, but it’s important to move past the shame and take it!” In earlier days, there was a sense of shame in taking on debt and people avoided it, now it’s so common, everyone has it and feels it’s ok and it’s more important to buy things to show people you love them, like for example the holidays. Statistics show that the average consumer racked up $1300 on their credit cards just for the holiday season. While one in ten are still carrying debt from the 2018 holiday season! If you make minimum payments on this with an average of 18% interest, it will take six years to pay it off. 

On top of taking on debt, American consumers also report not having at least $400 to cover an emergency, which in turn leads them to going further into debt if an emergency arises. People on average have five major credit cards. It’s hard to get out of debt once you are in it. When people are desperate they need to know where to turn because it’s not just one creditor, it’s on average at least five and when they aren’t able to take care of it themselves, predators come out from all directions. 

Here more about the dangers of the “wild wild west” of the debt relief industry at the links below, what we mean by predatory, and what consumers should do instead at the links below: 

Part 1: The Problem with Consumer Debt and the Debt Relief Landscape

Part 2: Where to Turn for Free Help for Your Debt

Nonprofit credit counseling can help you figure out the right option for you and how to navigate the landscape of debt relief options. It gives you a safe space to deal with your debt, with a nonjudgmental ear. They are going to help you with a budget, do a thorough review of your complete financial picture and provide a plan customized to you. Credit counseling is typically free. They are there to advocate for you and ensure that you are better prepared to get out and stay out of debt.

“We are not working for the banks, we are working for the consumer,” said Rebecca Steele, “a lot of banks are working with us and we can work with them on your behalf.”

For the full transcript click here.  

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