Up until the last six months or so, most people I’ve talked to have been mainly interested in how to create tighter budgets. The big issues have been cutting back on groceries and other household expenses, paying off their credit card debt, saving for retirement and college, and other what I call “just staying afloat” issues within the family’s personal economy.
What’s changed? Not so much the cost of living, but the fact that many folks have lost their job. Many households require two incomes to make ends meet, and when one of those incomes is lost, it can mean the difference between paying the bills or not. Some folks are faced with an even more dire situation in that their entire income has been lost and are now living on unemployment, which will run out eventually. A few part time jobs now and again are keeping the family fed, but certainly not getting the bills paid.
Familys who are relying on every skill they have to generate some income are exhausted, and many are ready to throw in the towel. Bankruptcy is being discussed in many homes as we speak. This is not a pleasant discussion, I assure you. Bankruptcy, contrary to some belief, is not like dusting off your hands and starting fresh. It is a nightmare, albeit sometimes a necessary nightmare.
If you are staring at a pile of credit card bills that you simply cannot pay at this point, and you are about ready to give up, you may want to stop and consider a few options.
According to Gerri Detweiler, the Personal Finance Expert at Credit.com and author of “Reduce Debt, Reduce Stress”, there are negotiation tactics to discuss first.
In a recent discussion with Gerri Willis of CNN, Detweiler suggests dealing directly with your credit card companies before you consider bankruptcy. Once you’ve fallen behind in your payments by three, four, or five months, and your only choice appears to be bankruptcy, your creditor may be ready to settle on your bill for a lesser amount.
Detweiler has seen a change recently in the way creditors deal with their delinquent accounts. In the past, it was customary to automatically charge off delinquent debt and send it off to collections. Now, creditors are more likely to approach you directly with a settlement offer.
A creditor will not talk about a settlement with someone who is current with the account, or someone who just doesn’t want to pay their bills. Creditors will talk to people who are three or more months in arrears, who are in a hardship situation, and have the money to settle the account. If you have fallen behind on your payments, and you are trying to avoid bankruptcy, the creditor may be willing to settle in order to receive some money on your account, rather than no money at all.
Talking first with a bankruptcy lawyer will give you the information you need before you decide how or if you should settle your debt. Most bankruptcy lawyers give a first time consultation for free. They will be the first to tell you that bankruptcy is not always a good option. You need to get the facts about what bankruptcy will entail and what debt settlement will entail. Show them your credit card statements, discuss any settlement offers that have been made, and find out about your legal rights should a credit card company sue.
This being said, there are some practical matters to consider if you are unable to pay your credit cards. Of course, when you are trying to strike a settlement deal with a creditor, you have to have the money. Creditors will be looking for lump sump payments. You may settle for 25% or 50% of the amount due, but if you don’t have the money to pay it off, your negotiation won’t go anywhere. That may seem like a Catch 22, and it most certainly is, but if you decide to go this route, you’ll need to raise the money to pay the settlement.
Another practical matter to consider is forgiven debt is taxable income. Don’t let this surprise you at tax time. Your creditor will send out a 1099 declaring your balance forgiven as taxable, so be prepared. Talk to a tax professional before having your debt forgiven to find out if you can prove that you are insolvent, and therefore able to get that tax bill forgiven, as well.
Be aware, also, that your credit score will be seriously damaged by a debt settlement. But, if you’re looking at bankruptcy because you are in a hardship situation, having a bad credit score may be a better alternative than having a bankruptcy on your record.
If you’re looking at four or five credit card bills that are delinquent, you may be tempted to just turn everything over to a debt settlement company. Beware! There are companies out there that have really taken advantage of these situations and have hurt families further. Again, you may want to discuss going to a debt settlement company with a bankruptcy attorney. A debt settlement company may seem like the simplest solution to all your debt headaches, but you may be looking at even more serious headaches down the road.
Reducing or eliminating your debt may be the most pressing issue in your household today. If it is, do yourself and your family a favor and don’t let another day pass before you find out what you can do. If you have not been able to pay your credit card bills for the last three or four months, talk to a professional to help with your debt relief… and your stress relief.