Any one ever done Debt Settlement?

[MAGICX2]

Debt settlement is where you negotiate with those to whom you owe money (Credit Cards, Loans, etc.) a set amount that you will give them and they consider the debt settled (paid off). Say you owe $10,000 to Discover card (which I don't) you can negotiate with them so that your debt is reduced by 60%(or whatever you can agree on) of that balance and you only pay them $4000(or the percentage you agreed on).
I want to know if any of you have ever done this or used a debt settlement company or firm to do it for you. What were the results and how difficult was it.
Now I am a firm believer that if you can pay the debt then you should pay it. My DH and I have been working for over a year now to get our debts settled and while we are making some headway, it is not much. I have been off of work since March 8 due to a surgery. I went back to work on Mon. Aug. 14 and three days later I was laid off due to "restructuring of my department." We are barely making ends meet. I am quickly going to be behind in my payments to our cc's and loan.
We have only been saving for retirement for about 14 months. Together we have close to 16,000 in our retirement funds. If we can get the companies we owe to agree to a 60% debt reduction, we could payoff ALL of our outstanding balances if we cashed out our retirement.
Now I know some of you out there are gasping because I said cash out retirement funds. Let me just say that we are 29 and 30 yo and will be able to put away even more money for retirement and our childrens education by paying off this debt. I am desperate to get this paid off. We started the total money makeover by Dave Ramsey, but we can't even seem to get an emergency fund built up because of one thing after the other. I don't think we are ever going to get rid of it. It is like this giant cloud, weight, whatever that hangs over our entire family and drags us down. I just want it gone. I think debt settlement might be the best thing for us right now. What do you think?

 

[Stein]

Generally, cc's won't settle for less than the full amount unless they think there is a good chance they will get nothing, i.e. you must be way behind.

If you are current or near current, they will likely rather see the entire amount, no surprise.

Keep in mind, your credit will get wrecked if you settle, by yourself or through a company. If you go through a company, most of them will run a form of bankruptcy, which will stay on your report for a number of years.

I would suggest you do what you can to pay them all on time. If this isn't possible, keep trying to strike a bargain, eventually they will start to agree if you get far enough behind. But, they may sue you if the amount is large enough and you could get your wages and stuff taken by the court.

Sorry to hear your difficulties, just try to do the right thing and it will eventually all work out.

 

[EthansMom]

Together we have close to 16,000 in our retirement funds. If we can get the companies we owe to agree to a 60% debt reduction, we could payoff ALL of our outstanding balances if we cashed out our retirement.

If your money is in 401ks or Traditional IRAs and you "cash it out", you will first be hit with a 10% penalty and then will have to pay taxes on the full amount you withdraw. Casing out your retirement accounts could net you only $10,400. If your husband's 401k is with a company he currently works for, they may not let him cash it out while he continues to work for them.

Also, settling a debt for less than is owed has a negative effect on your credit report.

Have you applied for unemployment? It's not a lot of money, but should help if you qualify. Also, is there anything else you can do to reduce your expenses and/or restructure your debt (transfer to 0% interest rate cards or get a new loan with a longer term to pay off current obligations) while you look for a new position?

I've seen your previous posts and know that you've been working hard. You'll be in my thoughts.

Good Luck!

 

[MyGoofy26]

I've never done it, but have read numerous reports on creditboards (great place for more info) Make sure you get everything in writing, make sure that somewhere it says payment is considered to be "in full" and that any remainder will not be sold or passed along to a debt collector, otherwise you just wasted a lot of time. You may get taxed on the amount forgiven, so the other 40% you're supposed to be claiming in your income taxes as income so take that into consideration - depending on your tax bracket it may not even be worth it and you may as well pay that amount to the debt.

I'd also make sure this is an absolute last resort. Are you deal with original creditors? Or collectors? If your situation is bad, the original creditor may be willing to help you - perhaps by working out a payment plan and not tacking anymore interest on the amount right now. Depends on the OC - some don't even pretend to want to help.

 

[minnie1928]

Also, before you move ahead with this please research the tax implications of settling. I'm fairly certain that whatever is "forgiven" in the settlement is considered taxable income to you. For example, if you owe 22,000 and they settle for 16,000 then you would have taxable income from the transaction of $6,000. Definately not something that you want to be surprised about.

Good luck!

 

[Chris the CPA]

Good luck on settling your accounts. You should make sure you get any agreement in writing. Do not send them post dated checks or give them access to your checking accounts. Do not forget about the tax implications of the withdrawal from your 401(K) and the tax implications on the forgiven debt. You may want to see if you can get a loan from your 401(k) instead of a hardship withdrawal.

Chris

 

[summerrluvv]

Also, before you move ahead with this please research the tax implications of settling. I'm fairly certain that whatever is "forgiven" in the settlement is considered taxable income to you. For example, if you owe 22,000 and they settle for 16,000 then you would have taxable income from the transaction of $6,000. Definately not something that you want to be surprised about.

Good luck!

Yup and the creditor will send you a 1099-C at tax time, so you HAVE to claim it.

 

[seashoreCM]

If you do a real bankruptcy (chapter 13; chapter 7), any debts that are declared and then wiped out are not considered taxable income to you.

Disney hints:
http://members.aol.com/ajaynejr/disney.htm

 

[Robmom]

You should call the cc company and explain the situation. I had $6000 on one card and was having trouble paying it off. The cc company called me and set up a payment plan. I can't use that card until it is paid up in 5 years. They lowered the interest rate and it is getting paid off. They would rather get some money than no money.

 

[corndog]

I have not done one personally but have done work for various credit card companies. You really need to understand the effect this would have on your credit in the future. I recommend avoiding it at all costs.

Are your accounts individual or joint accounts? Perhaps if a majority is in one individual's name you could try it there then just not use that name in the future for any credit related activity.

 

[grlpwrd]

Well, I've known summerluvv a long time from another board and I know she works in a law office who deals with bankruptcies...right? I think her advice is wise, especially because she is employed in the field.

OP, is working forseeable in the future? I think if you are able to return to work sooner that might make a big difference. Did you already ask for a break in the interest rate and did you ask for a payment plan or make alternative arrangements? Instead of cashing out your retirement, you could just go for credit counseling and sign up with a reputable agency to make arrangements to pay off your debts. Of course, this has its own repercussions.

I know debt is like a grey cloud hovering over you, but I think if there are alternatives to cashing out your retirement I would at least consider them first. I think it may be habit forming to always rely on retirement as a safety net and I think it's dangerous.

Yes, by all means check out www.creditboards.com .

GL!

 

[MyGoofy26]

The more I think about this, PLEASE run the numbers before you make any drastic decisions. Figure out your tax rate and how much you'll be paying back for the forgiven amount. Add that to the penalty you'll be taking with cashing out your 401K AND the tax you'll have to pay on that. I'm sure you'll spend many thousands of dollars just to get the money PLUS the amount you'll end up paying due to higher interest rates because of the ding your credit will take for doing this - make sure it's REALLY worth it.

 

[mickeyfan2]

We have only been saving for retirement for about 14 months. Together we have close to 16,000 in our retirement funds. If we can get the companies we owe to agree to a 60% debt reduction, we could payoff ALL of our outstanding balances if we cashed out our retirement.

There will be penalties and taxes associated with doing this, so it may not pay off your debt.

We did this once with a landlord. We gave our notice and they denied that we did. We agree to a lesser amount and paid it off in a lump sum with a credit card. DH did not get the signed copy I told him to, so we had no proof that we gave notice. This was many years ago and only a few 100 dollars.

 

[Tiffer]

Now I am a firm believer that if you can pay the debt then you should pay it. My DH and I have been working for over a year now to get our debts settled and while we are making some headway, it is not much.

I have done this on one old debt to which my name was forged when I was a teenager..long story..it was just easier this way. My mother also did something similar through a through a non-profit place that she made structured payments....
My advice is DON'T DO IT!! My mom had the same old school mentality. That she owed the Money, so she struggled to pay it....BIG mistake. It took longer to pay off than a bankruptcy would have been on her credit report.

As far as the settling..a charge off or settled for less than original amount is horrible for your credit and stays on just as long. I would do bankruptcy. And use the money for your family to start over and maybe get head instead of always behind the 8 ball.

Regarding the taxes, I was never issued any tax forms, I don't know about that part.

GET EVERYTHING IN WRITING AND PAY BY MONEY ORDER. NEVER GIVE ANY ACCOUNT INFORMATION!

 

[disneysteve]

Let me just say that we are 29 and 30 yo and will be able to put away even more money for retirement and our childrens education by paying off this debt.

I'm confused by this. If paying off the debt will allow you to save "even more" for retirement, why not just use the money that you would be saving for retirement to pay the debt and leave your current retirement funds intact? Not sure what you were trying to say here.

 

[Lyn5]

OP, I remember a while back that you had a long thread about your situation and at that time things seemed to be improving. Were you able to sell your home?

 

[mickeyfan2]

I'm confused by this. If paying off the debt will allow you to save "even more" for retirement, why not just use the money that you would be saving for retirement to pay the debt and leave your current retirement funds intact? Not sure what you were trying to say here.

I read that more as a rationalization for taking the retirement money out rather than a reality. If 40% of the debt = $16,000 then the debt is about $40,000. This is a significant amount. This payment is the only extra amount that could be put away and it seems that there is not even money now for that payment. There really needs to be an increase in income and a decrease in spending. Not sure what their actual income is, but the rule of thumb is if your personal debt (non-mortgage) is equal or greater than your income you will never be able to pay it off.

 

[dvcgirl]

I think you're taking drastic steps too quickly. First things first...sounds like you need to find a job...and fast. If you are barely making ends meet with your husband's job alone, with you working wouldn't your situation improve dramatically? That would be my first move....

I remember reading recently that you sold your home and were now renting. I remember that you weren't using CCs any longer....a very good thing. Now it sounds like you have an income problem...you need more of it. Any chance of you finding a job in your area? If not, since you are renting...any chance of moving somewhere where both you and your DH could find work.

 

[mickeyfan2]

I just saw that you had a 5 day trip to the WDW staying at the BC, a 7 day trip to WDW and a Daytona Beach/NASCAR/WDW trip in an 8 month period (Dec 05, May 06 and July 06 respectively). This probably added much to your debt and would be a great place to look for extra money. I love WDW and vacation there often, but this would be the first place to cut back on to get that extra money from.

 

[corndog]

I'm confused by this. If paying off the debt will allow you to save "even more" for retirement, why not just use the money that you would be saving for retirement to pay the debt and leave your current retirement funds intact? Not sure what you were trying to say here.

The likely reason is that the interest rate on the debt is higher than the rate of return on the retirement funds, even if those funds are invested on a pre-tax basis. It's senseless to save money that earns a lower rate of return than any existing debt is costing you. For example, say you had $10,000 in credit card debt at 20%, and you had 10,000 you could invest at 10%. If you use the 10,000 to pay off the debt at the end of 1 year you have $0. If you invest (save) the 10,000, at the end of 1 year you'll have 11,000 in savings, but 12,000 in debt, so you'll be down another 1,000 by not paying the debt down with the funds you had available.

I don't want to get attacked again for not knowing all the exact numbers involved, but it is likely the OP would be further ahead by cashing out the 401k, even with the 10% penalty, because investment returns are currently low and the rates on her consumer debt are likely high. Also, the retirement funds are taxed at the current rates, and if they are down one job, their tax rates may be relatively low. It sounds like the perfect opportunity to cash out and smart money management to get back on course.