A funny but true lesson in personal finances.

Many of our students are looking to Debt Settlement Companies to negotiate for them to try to get a reduction on their debt load. Typically that would only include their credit card unsecured debt. We see a lot of claims from these companies in the media nearly from dawn to dark. Working with these companies can cost a lot. The point is that many of our students could save that fee, which is usually at least 15-20% of the amount “settled�. I recommend that you call your credit card companies yourself and explain that you are having trouble with meeting all of your obligations for whatever reason(s) and ask if they will work with you in reducing the monthly payments and/or the interest rates on the account. Most of them will work with you simply if you ask. Some will ask you to fax or mail a “hardship letter� to explain the reasons you can’t make the required payments. Some however will work with you right over the phone. It makes sense to try this approach first and save the hefty 15-20% fee that the debt settlement companies would charge you for this service.

Some of the companies will promise huge reductions in your debt but only if you can come up with the money for an immediate settlement. Often times they will discount the total amount due as much as 40% or more in order to get the money now and settle the account. However the law also requires them to file a 1099-C form with the IRS detailing the amount of debt that was forgiven, and it will be fully taxable the following April to the debtor. If your debt is settled for 50 or 60% of the original amount, that can make a sizeable tax bill you will have to deal with on your next tax return.

For these reasons, I suggest that you try to work with and do the settlement yourself. If that fails, usually you will still have the option to go back to a settlement company if you feel like the hefty fee is worth it. Regarding your credit, using such a company will have some ramifications. Communicating with these companies is almost always a better approach than ignoring them or hiding from all the pestering phone calls. A few of my students have negotiated very satisfying arrangements with their individual creditors and saved the headache and frustration of ruined credit and adverse future credit reports. Even if you send in smaller payments over a longer period, most creditors will continue to work with you under favorable circumstances if they know you are trying to make good on your debts.

Credit Card Companies Consumers in Debt

ABC News/Nightline interviewed two former employees that use to work for the credit card giant MBNA(Mellon Bank) Credit Card Company. MBNA was bought out by Bank of America in recent years.
Cate Columbo and Jerry Young both said that they were hired as Customer Service Representatives. They were put on the phone but not to necissarily help the customers with their concerns. There position was to “sell moneyâ€?. This meant that they would push the envelope to over extend credit to the credit card holders and allow MBNA to increase the clients limits to the extreme. Columbo & Young said that they knew the clients could never repay back all of the credit that was extended to them, but it didn’t matter to MBNA.
Columbo and Young said their goals were set to sell $25,000 an hour, which translates to $250,000 a day, $1 million a week, $4 million a month. MBNA made big money on the interest paid back. “The problem is that credit card companies push the debt on people who really can’t afford it because that’s the profitable thing for them to do,â€? says AFFIL executive director Jim Campen.
Columbo says it was a stressful job that she hated. It was hard for her to feel good about over loading others with debt at the benefit of MBNA.
Bank of America says that the past practices of MBNA are not their company practices. The point is made though, that credit card companies are in the business of making money by charging interest. MBNA didn’t care if a client was able to pay the whole debt off or not, it didn’t matter. Their bottom line was that by offering more debt, they made more money off of the interest.
We need to recognize the evil of credit card debt. It is an ever spiraling down ward trend to pull more money from our pockets to the bottom line of the credit card companies and their stock holders. We need to focus on living within our means and paying off our debt as soon as possible and not fall into the trap set by large credit card companies.