Home > 2015 > Managing Debt

Beth’s Story: Is Debt Settlement the Answer?

Advertiser Disclosure Comments 2 Comments

This is the third part in a four-part series about Beth, who’s struggling to make monthly payments on her debt. I encourage people struggling with unaffordable debt to use this as a debt relief information guide. The focus of this series assumes your situation is past being able to apply conventional wisdom, like lowering monthly expenses and paying extra toward high-interest credit card debts.

In the first two parts of my email exchanges with Beth (a reader who submitted her questions to me offline, and who has given permission for me to publish our exchange as a learning tool, but with her name changed; we have also removed the names of her creditors), I focused more on eliminating options to manage her debt based on her lower income, which is also unstable because her current employment is temporary. If you are just starting out with researching your own path to manage problem debt, you may benefit from reading this series from the beginning.

In this part, her questions for me are keenly focused on negotiating lower payoff settlements with her credit card lenders.

Beth wrote:

Tomorrow I’m going to look for a bankruptcy attorney, however I’m more inclined to do a settlement at this point, that being said I have these questions:

  1. I have a checking acct with [one bank] where I currently have 2k [saved] and will have a little over 3k in 2 weeks; do I have to withdraw the money before trying a settlement with them? (I’m afraid they would freeze my checking and keep the money), if so should I open a checking acct with another bank? I’m assuming [a different bank] wouldn’t touch my money.
  2. If I’m successful, the settlement would save me $20k, will that be taxed? If so can you estimate the amount (roughly).
  3. What is the best way to negotiate the settlement with [one bank] and the others? For instance: I would offer 25% and they counteroffer 40% then I give my last offer 30% and if they don’t take it, I would then not make the payment for the first time ever and hopefully they will call  me and take my 30% offer, would they call my bluff? And if they divide it into 3 payments can I try and negotiate 4-5?
  4. Can I be honest and tell them my plan to pay them: what I already have saved, plus what I’m going to make/or borrow from my parents?
  5. This may sound very dumb, but I have a $20k in my 401k, what if I withdraw about $5k, I know it would be heavily taxed, but is it something possible? I understand I’m not supposed to touch my 401k ever but in my situation it would save me interest and would be debt-free. What do you think?

If you could please take the time once again and I think I will be all set.

My Response to Beth

Those were really targeted questions Beth sent back. Here is how I responded:

1. I typically encourage moving to another bank if you have a checking or savings account with a bank that you will also be negotiating a credit card settlement with.

2.You can indeed be taxed on forgiven or canceled debt in excess of $600. Many people I have worked with over the years were able to meet the insolvency test, which meant they were fully or partially able to avoid any tax implications from debt forgiveness. I cannot hazard a guess at what your taxes would be. This is an issue you want to consult with a tax professional about. But if you determine you will owe any tax after settling, be sure that is part of your budget and planning.

3. The way you make calls to your creditors in the early stages of communication is one thing. You will typically not be offering to settle, or perhaps even be bringing up the subject until you are three to five months late with payments (unless they bring it up). I would not call my creditors and ask about settling for less than what I owe when still current, or not yet several months behind. It is a waste of energy, as the person answering the phone in these early stages may not be trained or authorized to even talk about it. In fact, and somewhat amusingly, you can call large credit card banks to talk about settling too early, and hear from the customer service rep that “we do not settle debts.” Read through the entire section about negotiating credit cards in the first stage of collection. You will be ready to talk with your creditors and negotiate your settlements when you finish.

You will typically not get your credit card banks to extend out payments — on the settlement amounts they agree to — for more than 94 days if they have not charged off the debt (taken the loss in their accounting books). Many banks might like to be able to offer their account holders that option (longer payment arrangements on settlements). But federal regulators have set guidance and policy that prevents them from doing that unless the account is charged off. Charge-off is one big determining factor banks use when they send accounts to outside third-party debt collectors and debt buyers, which is why settlements with monthly payments longer than a few months are often going to be achieved with debt collectors. There are often many opportunities to negotiate with debt collectors when your credit cards have just been charged off.

4. I find laying out your entire plan to negotiate and settle your debts with your bank or debt collectors to be counterproductive. They only care about the debt in front of them. Keep your focus to just the account at issue during any communications. If you mention other accounts, it is often just to say you are struggling with more than just paying them. They can see that because they typically have real-time access to your credit reports. When it comes time to have meaningful dialogue about what you can afford to pay as a settlement (which for you is not for many months), that is when you can bring up the fact that you are borrowing money from family to pay the deal if they agree to it.

5. Conventional wisdom says do not touch your 401(k) in this situation. That money is protected from creditors even if they sue you and get a judgment, and is also kept intact if you filed Chapter 7 bankruptcy. I am not all about conventional wisdom at all times. I have worked many cases over the years that were a great fit for borrowing against their 401(k)s. Yours is not one of those situations, in my opinion. That is something I would look closer at when there are complex assets, security clearances (work in finances, military contracting, etc.), or similar circumstances. Your path to successfully settling your credit cards looks straightforward to me.

Over the years of doing these types of consultations with people (primarily on the phone), and when encouraging people to understand they can negotiate settlements with creditors and collectors on their own, I have often repeated this: Debt settlement is not rocket science, but there is a formula to follow. That formula is 90% investing the time to become informed about what debt negotiation is, and how and when to get things accomplished. It took Beth and me three days and several emails to get to this point. But Beth also invested more time into reading up on her options in more detail.

In the next, and final, part of the series, you can see how Beth became more serious about doing something that I teach every person in the midst of a debt triage situation to do. Stay tuned.

More on Managing Debt:

Image: Hemera

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • junglegene

    This is very good info for DIY debt settlement. Shouldn’t Beth also consider enrolling in a non-profit debt management program? She can take advantage of pre-approved lower interest rates, consolidate her accounts into a monthly payment that she could afford and be out of debt in less than four years. She wouldn’t have to put up with collection calls, possible litigation and less negative impact on her credit score.

    • http://consumerrecoverynetwork.com/ask-a-question/ Michael Bovee

      The link at the top of the article will take you to the first part in the series. You will learn that Beth is working in a temp job. I rarely recommend consolidating debt with a nonprofit agency unless there is a dependable source of income.

      There is much about Beth’s situation that would suggest enrolling in hardship repayment plans, or with credit counseling, could still work for her, but only if everything in her life falls into place in the next 4 months.

      There is no room in her budget and income for life to happen.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team