Debt consolidation and collection agencies

Nurses CAN talk turkey to collection agencies!

In the last post I told you to avoid debt consolidation agencies, but I really want you to understand why and not think I’m just prejudiced against these financial behemoths.

It seems like it would be such a wonderful relief to be able to hand over all those nasty and tense phone calls from creditors. But the reality is that the phone calls don’t stop just because you engage the services of one of these companies. The way they typically work is this: you pay them an up-front fee of $700-1000 and then you send them a payment every month which they save for you. Of course, you often have to pay a monthly “management” fee as well for the privilege of them saving your money for you. Once you start paying them, they tell you to stop all payments on your credit cards.

When you stop all payments, your FICO (aka Credit Report) score plummets. Your account will most likely be turned over to a collection agency who will continue to harass you with threatening phone calls. As your FICO score drops, you will end up paying more money for any loans you take on – if anybody is willing to lend you money at all! Your car insurance is also likely to go up as you are seen as a poor credit risk for them as well.

After about a year & a half or so, the consolidation company will take all of the money they saved for you and approach your lenders (or collection agencies depending on who now has your loan). They usually negotiate a payoff to the lenders equal to 40-60% of the original amount you owed. At this time they will collect from you one last fee which will be a percentage of the amount they settled for you (usually about 15%). The last insult is that you will likely low taxes on the difference between the original loan and the settled amount. For example, if you originally owed American Express $30,000 and you ended up settling for $16,000, you will have to pay taxes on the $14,000 difference just as if it were income you made in your paycheck.

So with a debt consolidation company you pay:

$700-1000 initial fee

monthly management fees

resolution fee of 15% of the total settled amount

the actual amount of money settled with the creditors

and federal taxes on the difference between the settled amount and the original amount!!!

All with the cherry on top of a ruined credit score making it almost impossible to take out any kind of loan again (for at least 7 years or so).

So just think about how much money you would save by dealing with the credit companies directly – thousands of dollars and you have a shot at saving your FICO score since you’re not defaulting on your debt for over a year!!!

But if you do this for yourself, there are several steps you need follow to avoid any unintended consequences after you think everything’s over and done with. For example…..

1) When you negotiate an amount with your creditors, do NOT pay them with a personal check. Only use a money order or cashier’s check. They do not need access to your the name of your bank or your account number (which is printed on all of your checks).

2) Make sure you write on whatever you use to pay with (money order or cashier’s check) the following sentence: “IF THIS CHECK IS CASHED, THAT MAKES THIS ACCOUNT (write down the account number#) SETTLED IN FULL.” You do not want any doubt that you owe any further money to anybody, whether it’s a collection agency or the original creditor.

3) When you’re negotiating your settlement amount with your creditors, make sure before you’re through that they agree to report the debt as “paid in full” to your credit agencies instead of reporting it as “settled.” “Settled” will tell future lenders that you had credit problems in the past and will serve as a red flag, making you extremely undesirable.

4) If you’re settling with a collection agency instead of the original lender, demand (nicely, of course) that they specify- in writing!- that you are to be released from any and all obligations to the original creditor. The last thing you want to do after settling a huge amount with a collection agency is to have VISA come back knocking at your door to collect the remainder. Or worse, you don’t want creditors to be able to garnish your wages for the remainder – which they’re legally entitled to do.

5) Last, but certainly not least, ask the collection agency or creditor if they will state in writing that you don’t owe any taxes on the difference between the original debt and the negotiated settlement amount. Sometimes they’re willing to do this and sometimes they’re not. However, if you are deemed insolvent by the IRS (i.e. you owe more money than you have) then you may be able to get out of paying taxes on the difference.