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
posted by Leo Quinn @ 8:01 AM
15 Comments
15 Comments:
My daughter is using one of these companies to pay off her credit card debt. The amount she has to pay is over $200 per month and at the moment, they have over $5,000 of her money stating they are still negotiating with her credit card company to reduce her debt from over $10,000 to the amount she has on file. She has paid off several of her credit cards this way. She got into such deep debt by purchasing her first home on her very low salary, being a single mother and having 2 small children who needed clothing and supplies for school.
I was not aware that the credit card companies could call the IRS and share what you didn't pay to them.
Thank you for your information. I'll pass this along to my daughter.
Tobey Craft
I was approached with this by Discover Cards, when my husband passed away last year and would be a great way to get rid of another of his debts. Unfortunately, I thought that this was on the up-and-up until I was informed that the difference was TAXABLE INCOME!! It pushed me into a bracket where I was required to pay taxes instead of getting an income.
The big problem is that you need to pay the company that is consolidating your debt, and you need to pay all existing debts until you get approval through this company that the credit card company has approved the agreement. Otherwise, the credit card company in addition to harassing you constantly will note in your credit file that you are 30, 60, 90 days late or whatever and this lists on your credit report for years after. Alot of places where you go later to get credit will deny you because they look at this consolidation as a form of bankruptcy even though it is not. If you can afford to pay the company and your bills until all your creditors agree to accept the reduced rate then you might be alright but will still get harassed. And if you pay all that anyway, just work to pay them off yourself and feel better about it. There is no free lunch when it comes to credit.
Leo,
I tried one of those credit reduction companies a while back. I spent a few months thinking about it and it looked too good to be true. I chose the best one I could find at the time.
I had to stop my credit card payments for a month to raise their fee. I found out that their negotiations consisted of sending a letter asking for a lower interest rate. One company balked and wouldn't negotiate until my account was up to date. It took two months to find this out though, since the credit reduction company did absolutely nothing and I had to finally do the work of finding out what was wrong.
Their take was monthly. I had to send cashier's checks to them which took extra time on my part. With the rate cuts and the added fees my net monthly savings was about $10 out of $700-800 payments. Wow!
The debt-consolidation thing is something that we've looked into, talked to people, and it is not for us (or anyone we've met). But I was surprised how many people aren't aware that THEY can negotiate with their credit card companies. It is kind of a headache, in that it takes some time, but if you're smart about it, it can pay off. As with everything, you need to know how your card works, but for the majority of ours, if we use the card once a month (gas) then every three months we are 'eligible' for either an APR reduction or a raise in our credit line. Also, there are usually some sort of incentive, no transfer fee, no APR for 6 months, etc. I love the no APR. Then I put what we can pay off in 6 months onto that card, essentially borrowing it for free. Just make sure that it doable for you. If there is no APR, but there's a transfer fee, is it more than you'll save/ things like that. Also, remember that the people working for the credit card companies are people too. If you feel that you aren't getting anywhere with that person, thank them for trying, and hang up. They have sites all over the place, so even if you get routed to the same site, the chances of getting that same person is slim to none. Also, the more confident and calm you are, the more likely things will work out for you.
That's all I got. :)
Hope this can help someone. :)
I've been down the debt consolidaters path before and was not impressed. I just talk to the credit card company myself and see if they we can work out a deal. Bypassing the middle man.
What you write is my experience, with perhaps some difference. I was notified to appear in court and was advised not to go. I didn't go and nothing happened. Also the monthly payments went o pay for the "service", not against the debt. It seemed rediculous; all the while I was paying out money and getting the calls and letters you mention which I was instructed to ignore - one of the banks called my neighbor who left an annonomous note that the bank wanted me to call them because they were unable to contact me. I finally quit the process because all my payments were going to the company for their "service" and simpny did my own negotiating. The credit card representatives did not treat me badly. They were patient and allowed a removal of some of the debt, perhaps 20 or 30% and allowed me enough time to pay them. Of course the accounts were closed.
It is better to do it yourself.
Doris Roberts
These companies are preying on the people who are most vulnerable - those who are stressing over debt - when there seems to be no relief in sight.
Most credit card companies will work with you to lower the amount of interest, which can lower your minimum payment, for a period of time. It is in the card company's interest - try to get the money from you or get nothing if you default or are able to declare bankruptcy. It just takes one (or several) phone call(s) to the customer service number on the back of the credit card. Try to talk to a supervisor if possible, but always remember to write down the name of every person that you talk to at the credit card company and what they said to you.
If the credit card company reduces your interest rate and you continue to make your payments on time your credit report will show good comments. But if you use a negotiation company chances are that you will become delinquent prior to any payments being made to the credit card companies and this will stay on your credit report for up to seven years.
You will not be able to reduce your bills by the 50% that is stated by the negotiating companies but they are not able to do that either for most accounts. The credit card companies only will do this if they think that is the only way to receive some of the money on the account. If they do this, the accounts are closed by them (noted as such on the credit report) and is possible that the amount forgiven will be reported to the IRS as "earned income" which is taxable. Unfortunately, this is usually not reported to the IRS until later and then you receive a notice of amount due plus interest (and possible penalty for underpayment) dating back to the due date of your filing.
I would never consolidate my bills, essentially refinancing them.
I had great success with Consumer Counciling.Their charge was eight dollars a month and they paid all of my bills with the one payment from me of 800.00 per month. I was able to pay off 22,000 worth of debts in only four years and now my credit is better than ever. You have to agree to cut up your credit cards befor you start. I would highly reccomend it.
"The TRUTH about debt negotiation"
Thanks for getting this information out to people. I have been telling my clients for years not to talk to these people about them reducing their debt. Most listened to me but there are always a few who don't. There are always a few who don't listen but for those who do it is all worth it.
Anonymous
Avoid these companies. They are doing just what you can do, with a little courage, on your own. They are NOT in this business because they want to help YOU - they want to help themselves to what money you have.
When my husband and I were first dating he was paying back one of these companies for delinquent student loans. His payment was $100 - but looking at the fine print one night I found that he was paying $1 to principal and $99 to them for their "service". He would be long dead before he'd get half of this debt paid of at that rate! He ended up going to a bank who helped him get a 4 year loan and use his car as collateral. During that time he paid cash for everything and incurred no new debt. Within two years he paid off his loan and started building his credit from there.
Our credit is now "sterling"... and we use it rarely.
Hello, tried something similar with a company out of Florida. They told me the same thing I had to be in default by three to four months, not to have any communication with them, tell them to contact him (my rep) and that it show on my credit record that I am in good standing. The other item they told me was that they would never show on my report either. ALL LIES...
There is no rule that says they will not show on your report, nor the payments to creditors will show in good standing, nor that creditors will readily accept the negotiations, even after three months. My original debt is still pending despite the payments for three + years. And don't become ill, unemployed and cannot make the payments according to arrangements, because the debt reverts and you are still in great debt.
What really is key here is doing your homework. The legitimate companies can really help, but don't think they will knock your payments down 40%. MAKE SURE you are using a NOT FOR PROFIT organization, and one that is certified by the NFCC or AICCCA. I have been using one for 8 months, and my first payment to them was posted to my credit card accounts. Unlike some that say 3 or 4 months. Go to http://www.nfcc.org/ and find an office near you. It cost me about $40 a month for about $30,000 worth of debt.
My husband used a company similar to ones you are discussing. They took his money and did absolutely nothing for about six months. When we got married, I sold my house and we paid off a few of his debts with that money. Meantime, a couple of the credit card companies he owed with his former wife called and we were able to negotiate our own 50% deal with them, and as far as I know we did not need to notify IRS - we didn't get a 1099 from them. We notified the Attorney Generals of the states involved and we were able to get his money back.
I have been through debt issues more than once. I would like to share what I have experienced with all of you. I 100% agree with Leo, and here is why....
The first time I got into debt was in the '90S during my first marriage. At the time I was living in Dallas. Since my ex and I are disabled since birth, neither of us had a very high income. Unfortunately, for many individuals who are disabled, the cost of living can be higher than our actual income. I will admit, though, approximately half of the debt was "careless spending". The other half was due to unfortunate circumstances and our income limitations. My debts, at that time, totalled probably about $3500. Bankrupty for that small amount was obviously not the answer. I then found out about CCCS. Consumer Credit Counseling Services. A Non Profit agency. CCCS is the "model" that these debt negotation companies try to trick you into believing that they utilize. It took me slmost 4 years, but I paid off all the debts via CCCS and my entire credit line was restored. Fast forward to 2005. Life happens again. Just like last time, some of it was unfortunate circumstances. Other debts were beyond my control, thanks to social security messing with my benefit amounts. Unfortunately, this time, CCCS was not an option. When I was investigating into solutions to my dilema, I found Leo and his program. Unfortunately, my current husband and I did not have the income then to utilize the program. Sadly, I had no choice but to consult with an attorney friend of mine. Yes, our credit is ruined by bankrupty. For a lovely ten years. Mind you--when you put $175,000 in debt vs $12,000 a year income in disability benefits---(my husband got laid off in August of last year--we did not even know this was coming---happened literally, five business days after we filed bankrupty)--there is simply no way a debt of that size can be repaid. It is not a pretty situation at all. It can be a downright embarassing situation to some. But I am not ashamed to be honest. We are both responsible for this mess that we had no other way to get out of. My husband bought a condo when he probably should have never done that, as he really did not have the income to upkeep the condo. He also made some very unwise decisions---of refinancing several times. (No one taught him the ins and outs of stuff like this--mortages, financing, adjustable rate loans, etc. His first loan was a flat rate and should have left it alone. I am blessed with a wonderful mother who has always taught me the rights and wrongs of doing things in life. I have since explained and educated my husband. Yes it has cost us. Dearly. And cost me my credit too. Now it will be a long time before it is restored. I now do not even believe in a mortage. Believe it or not! My mom bought her house lock stock and barrel--paid it in FULL when she had it built too. She did wisely--she sold her mother's estate and our old house before she even bought this house. And this is a woman who has NEVER even heard of Leo's program! If I was ever to have a house of our own--I'd rather invest the funds into a CD account and let it sit and accumulate for five to ten years, then take it out, and buy something totally paid for. Mainly because I can't trust my husband to get us into a "mess" again. We now only spend what money we have. We have not yet been able to start saving--basically living from paycheck to paycheck--but this is due to the fact that we are waiting on social security to come through with hubby's disability benefits, which are still in the "pending" phase. I fully believe everyone should utilize Leo's advice and his program. It is all just plain common sense. Yes credit cards are nice, BUT they come with such heavy strings attached. It is just so not worth it. And remember--any debt consolidation program that is NOT part of CCCS is NOT a legitimate program. What I mean by that is that they are only acting in the interest of themselves, not out of concern for you and your debts. Also--any company that claims to be CCCS--double check with the BBB before you even work with them to make sure you are not being scammed. It is all about being financially responsible. For those who are below the poverty line in income like us--this is nearly impossible to do--but it CAN BE DONE. The key is to establish your budget, your residence of living, your living standards, etc etc all by the type of income you have. Being poor is not pretty, but being thousands and thousands of dollars in debts is downright ugly. I personally believe this world relies too much on credit and credit ratings. Listen to your grandparents. The "old days" were the good days. People knew how to be financially responsible. People actually saved. People bought a house, stayed in it til they grew too old to keep it up any more, and so on. People left inheritances for their children and grandchildren. Nowdays its all about materialism--being better than your neighbor blah blah blah. It's time to just go back to your humble roots. We have NO credit cards and I am keeping it that way. Someday we might have ONE visa again for emergencies, but that's it. Plastic is the root of all evil. I hope that my experience is a big eye-opener. Don't let yourselves get into even bigger messes. If you are not sure about a debt consolidation company, go to the BBB. Run a check on them. Use that as a motivator to avoid them like the plague. Go to CCCS instead, if you are unable to trust yourself to clean it all up utilizing Leo's advice. Do not ever, ever, EVER file bankrupty, unless you genuinely have exhausted all options like we did, and do not have the income to get yourself ou t of it. Last and not least, be financially responsible. Spend wisely, then you won't even need to pull yourselves out of all of that.....lol. Sorry this was so long but I felt it was important to share my experience as I have seen both ends of being in debt--twice.I pray to God that it does not ever happen to us again. It shouldn't, since I have Leo's program....which, by the way, is SO worth it!
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