Viewer Question: Can I Negotiate Debts Myself?

Here’s an email I recently received that asks a good question: actually, several good questions. If you’re in trouble with debt, check it out.

To make a long story short, I’ve been looking for permanent full time work for over a year. A former client finally paid me but with a bad check. I warned my bank that I was leery of the check. After five days, I called the bank which informed me there was “no problem.” So I mailed out my vendor checks.

Boom! Seventeen days later – 17 days – I got a form letter from the bank: the check bounced and they used my savings to make good all the checks I mailed out plus fees. (The asst. bank mgr. literally said to me, “It isn’t our fault you listened to us.” Swear to God, she said that!)

I was truly wiped out financially. Each month, for eight months, I have only been able to scrape by for rent, utilities, phone, car fuel and if anything is left over, food – in that order. Nothing in credit card payments because I literally didn’t have it. (I told this to one collector calling. He said to me, “Gee, that is really unfortunate but I need you to send us $45 today.”) I didn’t have money for a medical problem either but no one seemed to care about that.

We finally caught the bad check guy. He has agreed to pay a settled lump sum – 42% of what I am owed (yes, we know the money is good this time).

I am willing to make good to my credit card companies for 60% on the dollar which – if you take out all those ridiculous fees and high APRs – wouldn’t be bad. (BTW, in the past when I tried to add pre-agreed-to late fees to my clients. Two small claims judges merely threw out the fees.)

So in the spirit of “everything is negotiable, ” I want the card companies to remove all negative info on my accounts. I talked to two CRAs. They both basically said the same thing: “we merely report what is sent to us.” So they don’t care.

A while back there was a guy testifying before the Senate re: credit cards. He showed documents that he paid $22,000 on a $9,000 credit balance. I said then I’d kill myself before I’d do that.

I want my life back. I never had a mark on my credit for 39 years. Should I live the rest of my life based on eight months of problems?

After I pay off the credit cards at 60% on the dollar, all the bad credit info removed, and have the medical procedure finally done, I’ll have about four or five months of rent/utilities/phone/gas/food to live on while still looking for a full time job.

I’m 61. My mother died at 67 and dad died at 66. No grandparents lived past 73. If I have to wait 7 years to get good credit I might as well keep the money and blow off the credit card companies. Screw ’em.

Your thoughts?
Recommendations?

The second part would be …

I’ve heard a rumor if the credit card companies settle with you like I want to, they then report the FULL amount to the IRS and you have to pay tax on the full amount.

A. Is that true?
and
B. If it is true then what about the senior guy (I think the Breeze maybe the Times earlier this week) recently in got BofA to “write down $400,000 on his mortgage and do a reverse mortgage for $80,000. Is he going to pay tax on the $400,000?

If no, then what’s the difference and how do I avoid paying taxes on the “forgiven”/”adjusted”/”etc.” money?

Thanks for reading. Look forward to hearing back.

Paul in CA

Here are some thoughts and recommendations, Paul…

First, it is possible to negotiate with your creditors and offer them 60% of what you owe them. It’s also possible to do this while having any negative remarks they’ve added to your credit history – such as late pays or collections – removed. I hasten to add, however, that while it’s possible to accomplish all that, it’s not going to be easy.

Here’s my advice on what to do and what not to do:

What not to do:

• DO NOT attempt to do this through any of these heavily advertised debt settlement companies you see everywhere. For reasons why, see this article I wrote just this week about new rules for these companies – that story links to several other articles I’ve written on this subject that will help you understand why I don’t like these companies.
• If you attempt to settle these debts yourself, DO NOT believe any verbal assurances offered by creditors, and especially collection agencies, that accounts will be paid in full or that negative marks will be removed from your credit history. These people will say anything to get what they want. The only thing that matters is what they’re willing to put in writing, sign and have notarized.
• DO NOT try to talk to a credit reporting agency about removing negative information from your credit history – not only do they not care about your plight, they can’t do a thing to alter accurate information on your report. The only company that can have accurate negative remarks removed is the company that put them there.
• DO NOT believe it when the companies who put the negatives on your credit history tell you that there’s nothing they can do to have them removed. They may say it can’t be done, or even that’s it’s not legal to remove negative items – both statements are untrue. They put it there – they can take it off.
• DO NOT bend to pressure from debt collectors who try to convince you that it’s best to send them a partial payment right away. These people neither know nor care what’s best for you. I’d advise not speaking with them at all – there’s no law that requires you to.

What to do:

• DO take a long, hard and honest look at your situation. If you’re running out of money and don’t see a job on the horizon, don’t even think about paying these bills – even if your creditors are willing to take 60 cents on the dollar. In other words, if you’re going to end up in bankruptcy anyway, every payment you make between now and then is money you’re literally throwing away. Mind you, I’m not suggesting you dodge your bills – if you can pay them, you should. But if you can’t, the sooner you realize that and act accordingly, the better.
• DO talk to a bankruptcy or consumer lawyer. These lawyers know how to negotiate debts, and they know how to keep both creditors and collection agencies off your back. If you find a good one, you’ll have a very valuable advocate – they’re dispassionate, professional and understand very well how to deal with creditors and collection agencies. They’ll also know how to negotiate to have negative marks removed from your credit history and make sure it gets done. Plus, they’ll know if you’re better off filing bankruptcy.

Bottom line? Before you agree to pay anything on your debts, make sure it’s the right thing to do. If it is, you’re probably better off hiring help to do it, because settling debts for 60 cents on the dollar is hard enough – getting all negative marks removed at the same time is going to take a bulldog. Hire one if you can.

And to Paul and everyone else out there in a similar situation, I’ll add something very important. I’ve never been in desperate straights with debt before, but trust me – I’ve been in desperate straights. And I know that there are times when you think nobody cares and your life isn’t worth living. Neither of these things is true. People do care – just not the people who work at collection agencies and credit reporting agencies. If you’re doing the best you can, don’t waste a minute feeling guilty. This has nothing to do with who your are – it’s just money. And if you end up with bad marks on your credit history for life? Worse things can happen.

Now, as to your other question about what happens to forgiven debt: generally, pretty much any forgiven debt can result in taxable income. If you owe $10,000 on a credit card and settle it for $6,000, as far as the IRS is concerned, you just earned $4,000. The same is true with a mortgage: forgiven debt is income and taxed accordingly in year it’s “earned”.

That being said, however, there are ways around it. Check out If I Settle a Debt, Do I Have to Pay Taxes? And if you end up visiting with a professional, ask them about it – odds are good that you can escape the tax liability.