Beware telemarketers bearing debt relief promises
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I keep getting calls about settling my credit
card debt and want to know if this is really a good thing. I owe about $20,000
on a few cards, and if I can get it down
to $10,000 that would really help
me. How does it affect a credit report though, and does it really
work? Should I use one of the companies that is calling me
or can you recommend another company?
Oh yes, I'm familiar with those calls.
I've received them, too. In the future, when you get them, I'd like you to say,
"Thanks but no thanks, and please take me off your call list." Then hang up. If
I were to suggest a debt settlement company, it certainly would not be a
company that makes random marketing calls.
In fact, I generally do not recommend
that people use debt settlement companies at all, even though there are some good ones out there. I'm sure it does sound fantastic to have what you owe
magically sliced in half, but unless you have extenuating circumstances, it's
really not the right thing to do. After all, I presume that you charged up the
cards and got the stuff. I see no reason that you should you get a 50 percent
discount from the credit card companies just because you don't want to pay the
So when would a debt settlement be OK,
or even doable? In general, it would be when the original creditor -- such as a
credit card company or a hospital to whom you owe money -- has sold your debt
to a collection agency because you haven't paid in a while. The collector buys
the account for less than the original amount due. Because of that, you might
be able to pay it off for a fraction of the liability.
How much of a discount you can get
depends a lot on the age of the debt. As time marches on and the collection
agency is no longer able to take you to court because the statute of limitations has lapsed, the amount they'll accept typically shrinks. Because
they can't sue you and the debt may not have much time left on a credit report,
they have a strong financial incentive to take what they can get.
As far as companies that settle
accounts on behalf of overburdened borrowers, well, they have come under fire
for poor business practices in recent years. Many hopeful people used them, but
got nothing in return. Some were even sued by their creditors during the
process. All this led to a tightening of the industry. Regulations went into effect in October 2010 that ban debt settlement telemarketers from collecting upfront fees. Additionally, they must also divulge how long
it will take to settle, if they can actually make that happen, and what the
full cost of their service will be.
Even if you were to settle your bills
(which you could do on your own, by the way, by negotiating with the collector
and coming to an agreement), there are repercussions to know about. For
example, your credit report will reflect the partial payment and that doesn't
look attractive to future lenders. And then there is the tax issue -- any
forgiven debt over $600 is considered taxable income by the IRS.
So what can you do? If you can't make
your payments because of a genuine emergency, either contact the credit card
companies and ask if you qualify for some type of hardship plan or make an
appointment with a well-regarded credit counseling agency and see how they
might be able to help. Otherwise, carry on and pay what you owe.
See related: How debt settlement works, how it affects credit scores, Debt settlement industry in flux as new rules start
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: June 22, 2011