The TRUTH about debt negotiation...

QUESTION:

(I've been looking into) companies who offered ...debt elimination &/or credit solutions - whereby they said that they can cut/reduce my total debts to 40 cents to a dollar because they can NEGOTIATE with the credit card companies and ask for the reduction of the debts to 40 cents to a dollar?

Then they will make a payment plan to spread my reduced total payment to 2
or 3 yrs. by asking me to open a bank account where I will deposit the
agreed monthly payments, and where the monthly payments will be taken out
to pay the different credit card creditors, and their fee is 15% of the
total debt which they will be paid in installments and become fully paid
during the first 6 months of the 2 or 3 yr payment plan.

But they want me to go into default first for 3 or 4 months before they are
able to NEGOTIATE with the different credit card companies.
What do you think of these offers by these companies?

The reduction of my debt by 60% is so enticing.
What do you think? Please enlighten me.

Rosalind

ANSWER

Rosalind:

I can answer this very quickly.

Stay away from these companies.

They wreck your credit AND if the creditors who agree to accept 40% on the dollar, inform the IRS, then you will get a tax bill.

Example:

You owe $10,000.

The company gets you a settlement of $4000.

Credit card company tells IRS you received $6000 in unearned income.

In the 30% tax bracket? You get a bill for $1800 (30% x $6000) at least.

So that's the $4000 settlement +$1800 in tax + their fee for the negotiation $1500 + your credit is ruined.

Notice how this company gets their fee within 6 months, so when this all blows up they can walk away unscathed. You are left with new debt, old debt and a credit report that's a mess.

Oh, and during the time you are in default you'll be getting calls and letters from your creditors...a LOT of calls and letters. If you send one of those letters to your creditors telling them to stop it, as you are entitled to do, you may be sued in court.

I hope people reading this who went down this road or know someone who did, will let us all know how it went.

So my very short answer is "Not worth it", Rosalind.

Hope this helps.

Best wishes,

Leo

Should We Buy A House?

Hey Leo,

I have a question for you. My husband and I just got married last year and found out last week that we are expecting a baby. He has a daughter and I have a son so this will be our first together, and we are very excited.

However, we are currently renting a small two-bedroom twinplex and would very much like to buy our own house and have a nursery for the new baby. Our credit scores aren't great and we wanted to get a consolidation loan to pay off all our debt since we are only paying minimum payments at outrageous interest rates right now and getting nowhere fast.

The banks have turned us down for this loan for our credit being so bad. Any suggestions on where we can turn? The whole point in us getting this loan is to help boost up our credit scores, but no one seems to care about that.

Signed,
"Drowning in Debt"

Dear Drowning:

Congratulations on the new baby.

Sit down and write those banks who turned you down a thank-you note. You signed yourself "Drowning in Debt", and you think a mortgage will improve that? A mortage AND a new baby?

Debt consolidation loans do not PAY OFF YOUR DEBTS, they simply move it around. Be a minute late with a payment and your rate will probably go up.

Robert Kiyosaki, author of Rich Dad, Poor Dad, calls a single family home the single worst investment a family can make. Why? Among other reasons because of the upkeep. Now you can call the landlord. If the roof leaks in your own home, you are responsible for fixing it and paying for it.

I'm hoping some of my readers will leave comments on their own horror stories, thinking their own home was going to solve all their problems. I know those stories are out there because I hear them all the time.

I promise you, without a dramatic increase in your income and proper money management that house will, in short time, be an anchor around your neck. My advice to you is to hunker down where you are or find a bigger place to rent for the price you are paying now.

Don't spend your time and energy looking for more loans or buying a house with "no money down". Work on increasing your income. Your credit will improve as you pay your bills
on time.

I don't mean to sound harsh but I'm hoping to impress upon you that a new house AND a new baby are probably too much to take on based on what you've told me.

Good luck!