Debt Negotiation 101
- Thursday, November 20, 2003
1. If you’re maxed out and stop making payments on your credit card accounts, you’re going to get hit with a late fee and an over limit fee every month. Now expose all of that to the already outrageous double-digit interest rate and your effective APR can zoom to 40 percent or more.
2. A creditor can agree to a settlement and even after you’ve paid it that creditor can (and probably will) pursue the balance at a later date by turning it over to collection. Settlement can be tricky.
3. Lenders report settlements to the credit bureaus as "Settled." This will appear on your report as an R9 which is the lowest possible rating, just one notch above bankruptcy. It will stay there for 7 years from the date of final payment.
4. You can negotiate your own settlement directly with your creditor. One lady reported that when she called on her own behalf she was treated rudely, but when she had a friend call as her representative, she was treated professionally and eventually negotiated a settlement.
5. If the amount forgiven by settlement exceeds $600, expect to hear from the IRS. The creditor is required by law to report the forgiven amount as taxable income. You will receive a Form 1099 showing the amount you must claim as income on your next tax filing.
Debt negotiation is so problematic, it should really be seen as a last-resort measure, if ever, and only after giving credit counseling a fair chance.
I will concede that there may be circumstances when negotiation is an appropriate course of action. Examples might be when both the creditor and debtor are anxious to reach a compromise or in the case of an old forgotten debt, an "inherited" debt from something like a co-signing gone bad or a large medical debt.
I hope it never happens, but if you should find yourself in need of a debt negotiator and you cannot represent yourself, do your homework and then carry a big stick. Here are some guidelines to follow:
- Check out the company with the Better Business Bureau in your area as well as your State Attorney General.
- Make sure you know the fee structure. Is there a monthly charge? A set-up charge? A penalty for leaving the program? Are these fees mandatory?
- Make one of your deal points that the lender will report "paid as agreed" to the credit bureaus.
- Do not stop making payments on your debts in an effort to trick your creditor into negotiating more aggressively.
Under normal circumstances of just too much debt, you have much better and more ethical alternatives:
Develop your Rapid Debt-Repayment Plan®. One of our most important tenets of "Cheapskate Monthly" and "Debt-Proof Living" is our do-it-yourself plan that helps you get yourself out of debt quickly and honorably without paying a penny in fees or stiffing a creditor for even a dime. It’s exciting and it works. Read Chapter 7 of my book, "Debt-Proof Living," for the entire plan and also see a demo of the RDRP Calculator® at our website, www.cheapskatemonthly.com.
If you are behind, cannot get caught up and are continually unable to make even your minimum monthly payments, seek the help of a reputable credit counseling organization like Consumer Credit Counseling Services of Atlanta, 800 251-2227; www.cccsatl.org.
Beyond the logistics of how it works is the matter of ethics and right-living. Lenders have the legal and moral right to full payment under the terms to which you agreed, regardless if you’ve now soured on those terms. Paying your debt is the moral thing to do.
If by chance you are tempted to sign on with a debt negotiator — and have the ability to plunk down 60 percent of what you owe in cash — why don’t you do the right thing and pay down your debts with that money, now?
Copyright © 2002 The Cheapskate Monthly. All rights reserved. Reprinted with permission.
"The Cheapskate Monthly" was founded in 1992 by Mary Hunt. What began as a newsletter to encourage and empower people to break free from the bondage of consumer debt has grown into a huge community of ordinary people who have achieved remarkable success in their quest to effectively manage their money and stay out of debt. Today, "The Cheapskate Monthly" is read by close to 100,000 Cheapskates. Click here to subscribe.
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