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.
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? — Dan
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 entire bill.
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.
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