Is Debt Settlement Worth It?

rebuilding credit

Many Americans struggle with an increasing amount of debt and a desire to be in a more stable financial situation. In contemplating how to overcome large amounts of debt, some consumers may pursue the route of debt settlement in order to decrease the amount of money they must pay back to their creditors. Although debt settlement can be an effective way to pay off your financial obligations, you must consider the benefits with any potential setbacks that may occur.

Debt settlement is when you negotiate with creditors to pay less than the full amount for a debt you owe. Negotiations occur and you make an offer to the creditor, for example, to make a lump sum payment of $2,000 instead of the $4,000 you owe. If the creditor accepts your offer, you then would make your payment and the account will be settled, meaning you will have no additional obligation to pay the creditor for the full amount.

The benefit of not having to pay your full obligation to the creditor seems very attractive on its face, but must be reconciled with the potential downsides of the settlement. Many people do not want to undertake the task of negotiating the debt themselves and will hire a debt settlement company to work on their behalf. The following are a few of the main things you should look out for and consider when deciding if debt settlement if the right path for you:

  • Making payments towards your debt during the settlement process

    Some companies will advise you not to make payments during the process as it will make your financial situation seem more dismal, and possibly more likely the creditor will want to settle the account for less than the full amount. By not paying your bills, however, you may rack up more fees and interest during this period, and there is no guarantee the creditor will agree to a settlement.

  • Amount of Fees charged

    Make sure to pay attention to and fully understand the fees associated with using a debt settlement company. Often times, the company will charge you a fee equal to the amount of money paid to settle the debt, which could be as high as 25% – 30%. Alternatively, companies may charge you a lower percentage equal to the total amount of debt owed. You should also ensure whether money paid to the company is going directly towards your debt or if it is being applied to the company’s fees.

  • Tax consequences

    Because the amount you ultimately settle for is less than your total obligation, the creditor will report a loss on the amount of money not paid. If this amount exceeds $600 then the creditor will report this to the IRS, who will in turn consider it income and require you to list it with your taxes. Depending on the amount of debt forgiven in the settlement, this may cause your refund to be significantly lower or cause you to owe more money in taxes to the IRS.

  • Impact on your credit score

    If you choose to settle an account instead of paying the full amount owed, the account will show as “settled” on your credit reports and will reflect negatively on your credit history. The account will reflect this way regardless of whether you previously paid the account on time or not. If the account was never late and then settled, it can remain on your credit reports for up to 7 seven years from the date of the settlement. If the account was already late or delinquent before being settled then it can stay on your report for up to seven years from the date the account first went late or delinquent. Furthermore, failure to pay a debt in full will almost always be a sign of risk to potential lenders.

The decision to attempt to settle your debts either yourself or through a company should be carefully thought out and based upon your own personal circumstances, with both the advantages and disadvantages kept in mind. It is also important to consider other means to begin paying down your debts, such as debt consolidation or a debt management plan in connection with credit counseling. If you have questions about what method would be best for you then strongly consider speaking with someone who can assist you along the way or point you in the right direction.

Learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

arrow Read this post

Debt and Marriage – Should we merge our debt?

rebuilding credit

Many statistics show that financial issues are some of the biggest triggers for marital problems. Couples who are considering marriage or have already taken the plunge need to have serious, open discussions about their financial situation before deciding to combine their personal debt and making plans to pay off outstanding bills.

The best approach is to have the financial discussion before saying “I do.” Discovering that your new spouse has serious financial problems or is deeply in debt can be a very unpleasant surprise, especially if you plan to purchase a house or automobile together. You may be impacted by your spouse’s low credit scores or get calls from collection agencies. However, it is never too late to get all the cards on the table. The key is to have the conversations and keep the lines of communication open when it comes to the financial aspect of your relationship.

Consider the following question to start the dialogue: Exactly how much money do each of you owe in student loans, credit cards, car payments and other financial obligations? Providing exact numbers when possible and being completely honest is important to give a realistic view of the current financial situation, which aids in the next step: Establish a budget to address your outstanding obligations. A budget will also help you save for the inevitable financial emergencies that can hit any couple, married or not – a roof destroyed in a hail storm, unexpected medical expenses, or unforeseen accidents that cause one or both partners to be out of work. Open communication and a good budget are imperative for a financially healthy relationship.

Teamwork

Some couples opt to keep their own separate bank accounts and handle things in a more complex fashion – and as Dr. Phil likes to say, “good luck with that,” especially when it comes to filing jointly or separately at tax time. But if you and your significant other are at a point in your relationship where you can combine your finances in a peaceful manner, working as a team definitely has its benefits in achieving your budget goals. The first thing you may want to consider are the different ways to merge your bank accounts that will best suit your relationship.

Teamwork is also an effective way to pay off outstanding debts. If one spouse is the sole bread winner or makes a significantly higher income than the other, then that spouse may have to consider paying off the other’s outstanding debts, including student loans. Another option is to split the financial resources so that the larger income-earner is responsible for the rent or mortgage, while the other tackles some of the smaller financial obligations such as utilities, groceries, etc. A crucial step to paying off outstanding debt is to establish priority: which debts need to be paid off first? Couples who communicate and work together as a team can conquer the goal to eliminate debt in a smooth and efficient manner.

Proactive couples can also consider the options for debt consolidation. Depending on your financial circumstances, you may be able to negotiate with a lender to blend all of your outstanding credit card or other personal debts into one lump sum – allowing you to pay off overburdened accounts and make one central payment. Debt consolidation can simplify a life full of too many credit card due dates and possibly stop collection calls, but it is not necessarily a one-step, overnight solution to repair your credit.

Many couples are confused on how marriage affects credit. As most of us have experienced, credit impacts almost every aspect of our lives in one way or another and can be an important factor when considering the best options to tackle debt in your relationship. Couples may need assistance with credit repair and can benefit from the help of experts in the field. You can consult with us on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

arrow Read this post

Should I Borrow From My 401(k) to Pay Off Debt?

rebuilding credit

Of all the American households that carry debt, many of them are in fairly deep, averaging more than $130,000 in debt. That amount can cost up to $6,600 per year in interest. If you are paying high interest rates or your credit score has been negatively impacted by high debt, you might be wondering whether or not borrowing money from your 401(k) is a good option.

Considering that six in ten Americans don’t have $500 in savings, and therefore, no emergency fund, many people look to loans as a means to reduce monthly high interest payments or to consolidate debt into one lower monthly payment. But thanks to tighter lending practices, a traditional bank loan may not be an option if your debt-to-income ratio is too high, or your credit score is too low. If you find yourself in this situation, you may be eyeballing your 401(k) as the next best option for getting some cash.

Last resort option?

If you are considering borrowing from your 401(k), it is crucial that you understand taking money out of retirement should be used only as a last-resort option. Although this may sound dramatic, most people do not have enough money in their retirement account as it is, according to Bob Mecca, president of financial planning firm Robert A. Mecca & Associates.

“Many people don’t have enough saved for retirement in the first place, and when they take their 401(k) out of the equation and borrow the money — typically up to 50 percent of their balance — then that money is no longer working for their retirement needs,” Mecca told Bankrate earlier this year. “And the money is no longer growing, compounded and tax-deferred.”

Before moving ahead with taking out a 401(k) loan, here are some important factors to evaluate:

  1. Do you feel confident in your job security? If you are going to borrow against your 401(k), it is imperative to be confident about the security and future of your job. If you leave your job for any reason, you may be required to repay any loans against your 401(k) in full in as little as 60 days. Any amount unpaid after that time is considered a retirement distribution and may be subject to income tax, plus an early withdrawal penalty of up to 10% if you are under the age of 59½.
  2. Consider the impact on your paycheck. It may sound like a no-brainer, but many people do not account for the loss of income when taking out retirement loans. Remember that loan payments will be taken directly from your paycheck, leaving you with less cash in your pocket each pay period. This cut can lead to you dipping into the very funds intended to pay off your debt to make it to your next paycheck.
  3. Your regular contributions may be affected. Depending on your employer’s 401(k) plan, you may not be allowed to make your regular pre-tax contributions while you are repaying a loan. Not making pre-tax contributions can also cause your income taxes to rise during your loan period. Not making your regular contribution will further compound the negative impact on your overall retirement funds. The combination of these factors can have a significant poor impact on your retirement funds.
  4. Consider what your actual savings and benefit will be. The silver lining of a 401(k) is that interest rates are generally lower than what a bank would charge for a personal loan — particularly if you have a poor credit rating currently. Still, those interest savings typically won’t make up for the loss of earnings that retirement money would have accrued if left untouched.

When considering the tax implications, potential penalties and negative impact on the growth of your retirement, a 401(k) loan really should be viewed as a last resort.

Repair your credit

Drowning in debt and paying high interest rates are counterproductive to a healthy retirement, too. Before deciding to borrow from your 401(k), it is a good idea to consult with a law firm that specializes in credit repair. Doing so can help you understand your legal rights and options when it comes to repairing your credit and bringing your debt under control.

At Lexington Law, we not only provide legal expertise on how to clean up your credit now, we also provide the tools to ensure you maintain a healthy credit report going forward, so you can avoid putting yourself in a similar situation again.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

arrow Read this post

IRS Now Using Private Collection Agencies for Certain Tax Debts

rebuilding credit

Consumers commonly receive phone calls from scammers impersonating government agents to collect money. The Internal Revenue Service (IRS) regularly warns consumers about falling victim to phone scams, especially those involving payment for back taxes. Under a new federal program, however, the IRS will assign certain overdue federal tax debts to four private collection agencies (PCAs). These private debt collectors will contact taxpayers on behalf of the IRS to collect certain outstanding tax debts. Consumers should familiarize themselves with the IRS’s private debt collection program to protect themselves against scams.

IRS Private Debt Collection Program

Federal law requires the IRS use private debt collection agencies to collect certain overdue tax debts. In December 2015, Congress passed the Fixing America’s Surface Transportation Act (FAST Act). Although the primary purpose of the FAST Act is to fund transportation projects, Section 32102 requires the IRS to use PCAs to collect inactive tax receivables. Accordingly, the IRS implemented a new private debt collection program in April 2017.

The IRS assigns only certain accounts to private debt collection agencies. These accounts involve “inactive tax receivables,” meaning any tax receivable:

  • That has been removed from the IRS’s active inventory for lack of resources or an inability to find the taxpayer;
  • For which more than one-third of the applicable limitation period has passed and no IRS employee has been assigned to collect the receivable; or
  • That has been assigned but more than 365 days have passed without interaction between the IRS and the taxpayer or a third party.

The IRS does not assign accounts to PCAs if the taxpayer is:

  • Deceased;
  • Under the age of 18;
  • In designated combat zones;
  • Victims of tax-related identity theft;
  • Currently under examination, litigation, criminal investigation or levy;
  • Subject to pending or active offers in compromise;
  • Subject to an installment agreement;
  • Subject to a right of appeal;
  • Classified as innocent spouse cases; or
  • In presidentially declared disaster areas and requesting relief from collection.

Only four PCAs are designated to collect the tax debt on behalf of the IRS: CBE, Conserve, Performant, and Pioneer. Taxpayers will be notified in writing by the IRS and the PCA when an account has been transferred from the IRS to a collection agency.

Because the IRS uses only these four designated PCAs to collect a specific type of tax debt, consumers must remain cautious if they receive debt collection calls pertaining to other types of tax debt.

Other Tips to Avoid Being Scammed

Concerned consumers who receive contact attempts from someone they suspect is impersonating the IRS and requesting money can take the following steps to avoid being scammed:

  • If you know you owe taxes or think you might owe, call the IRS at 1-800-829-1040. The IRS workers can help with a payment issue.
  • If you know you do not owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1-800-366-4484 or at tigta.gov.
  • You can file a complaint using the FTC Complaint Assistant, choose “Scams and Rip-Offs” and then “Impostor Scams.”

 

If your credit has been damaged, learn how you can start repairing your credit here, and carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

Sources:

arrow Read this post

What’s the Average American Household’s Credit Card Debt?

rebuilding credit

Credit card companies provide a valuable service: they allow consumers to bridge the gap between what they want or need to spend money on, and what they can afford. The most responsible borrowers use their credit cards to bridge the gap, but then pay off their credit cards in full each billing cycle. Unfortunately, many borrowers spend more than they can afford to pay off, and therefore carry a balance from month to month.

Carrying credit card debt has become so commonplace that few borrowers give it a second thought as long as they can make their minimum monthly payment. The tradeoff comes in the form of interest payments, which add an additional premium to each billing cycle.

Today, the average American household owes $16,748 in credit card debt, according to NerdWallet’s 2016 American Household Credit Card Debt Study. That debt costs each household $1,300 in interest each year.

These numbers represent significant growth and also indicate a potential long-term problem. Without more responsible borrowing, many Americans could find themselves in a precarious financial situation.

“Taking on debt to cover the gap between income and expenses is a short-term fix with costly long-term results,” said Sean McQuay, credit and banking expert at NerdWallet.

What America’s Reliance on Credit Cards Means

American debt has grown in large part because the cost of living in America has outpaced income growth. Median household income has grown by 28 percent since 2003, but cost of living has increased by 30 percent over the same period, according to NerdWallet.

While it’s easy to assume Americans use their credit cards to buy luxury goods or take exotic vacations, sometimes people need credit simply to buy groceries. That’s especially true in a country where cost of living grows faster than income. Food and beverage prices, for example, have grown by 36 percent since 2003.

What You Can Do About Overwhelming Credit Card Debt

It only takes a few months for credit card debt to start spiraling out of control. Interest quickly adds up and a few big-ticket purchases can push you beyond what you’re comfortably able to pay off. Fortunately, you can take steps to improve your credit situation if you’ve identified excess credit card debt.

The first step is relatively simple but easier said than done: cut expenses. Find any recurring and non-essential expenses and eliminate them from your budget. If you can, try to increase your income. You could ask your employer for a raise, or take on freelance work to supplement your income.

If you’ve missed credit card payments, you might already be paying a price for delinquency. Many credit card companies charge hefty late fees and increase your interest rate in the event of a missed payment. Once you’ve reached this point, it becomes increasingly difficult to dig yourself out of a hole.

Working with a professional credit repair partner can pave a clearer path toward eliminating the costly consequences of credit card debt. A reputable credit repair service works directly with credit companies and helps them meet the obligations laid out in your customized credit repair plan.

Contact CreditRepair.com today to discuss your credit repair needs and options. We’re a trusted credit repair services provider and the only company with direct partnerships with the three major credit bureaus.

You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

arrow Read this post