What debt settlement companies don’t tell you
Posted on January 18, 2008
Filed Under debt advice | Leave a Comment
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1. Debt settlement may not be right for you
Debt settlement is a niche solution that’s right only for a small segment of the population, says Charles Phelan, founder of ZipDebt.com, who coaches consumers on do-it-yourself debt settlement. But don’t expect to hear that from a debt-settlement company. “People working the desks at the debt-settlement companies are working on commission and have the incentive of bringing as many people as possible,” he says.
You could be a good candidate for debt settlement if you’re heading toward bankruptcy, but don’t qualify for filing Chapter 7, Phelan explains. (Under Chapter 7, most of your unsecured debts are written off, but you’ll most likely have to sell some property including your home). “Most people who can qualify for Chapter 7 in all likelihood lack the cash flow to make debt settlement work for them,” he says. Debt settlement, in other words, might be a viable alternative to Chapter 13, which sets up a three- to five-year schedule with your creditors to repay your debts. (For more details on qualifying for Chapter 7 or Chapter 13, read our story.)
Likewise, if you can scrape up the cash to pay off your debts in a debt-management program, where you work with a debt-management company to pay off your balances in full but with lower interest rates, then debt settlement isn’t the best solution.
2. Your credit will suffer
Creditors don’t settle unless you’re severely behind on your payments. That means one thing: Debt settlement is damaging to your credit. Just how damaging it is depends on your track record. If you’re already behind on payments, your credit will suffer less than if you’ve managed to avoid delinquencies and credit charge-offs.
3. You could get sued
With bankruptcy, creditors have to stop collections efforts as soon as you file. That’s not the case with debt settlement. Even if you inform your creditors of your efforts to settle, they won’t stop trying to collect, Phelan says. Worst-case scenario, they could sue you for the amounts you owe. Should that occur the only way to avoid a black mark on your credit record would be to pay off the debt in full.
4. There are tax consequences
Debt settlement is a taxable event. Any forgiven balance that exceeds $600 is taxable income, says Linfield. “Sometimes that tax event can put people in worse shape than they were in to begin with,” she says. Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That’s a debt that the IRS won’t forgive. (Read our story for advice on what to do when you can’t pay your taxes.) One exception: If you’re insolvent — namely your assets are less than your liabilities — you can petition the IRS to waive that tax liability by filing form 982.
5. Our services might be illegal
While the laws regulating debt-settlement companies vary greatly by state, it’s worth noting that 12 states currently prohibit for-profit debt management. Since debt-settlement companies are for-profit entities, they’re not allowed to practice there. Those states are Arizona, Georgia, Hawaii, Louisiana, Maine, Mississippi, New Jersey, New Mexico, New York, North Dakota, West Virginia and Wyoming. If you live in one of those states, remember: It is illegal for for-profit debt-settlement companies to contact you and work with you, even if they’re based in another state. “Many companies do it anyway,” Linfield says. “And that’s a big red flag.”
Courtesy of SmartMoney.com
8 do’s and don’ts for fighting foreclosure
Posted on January 17, 2008
Filed Under Foreclosure | 1 Comment
In the beginning of the foreclosure process, homeowners can still save money, their credit or their house if they act quickly. Even when declaring bankruptcy, avoiding a foreclosure on your credit report can salvage your ability to rebuild credit and buy another house, which makes the struggle against a possible foreclosure well worthwhile.
1. Sell the property: If you can find a buyer before the house is auctioned, you can sell it and keep whatever equity still exists.
2. Work out a deal: Your lender may be willing to work with you, rather than lose money at a foreclosure sale.
3. File Chapter 7 bankruptcy: If you can’t get caught up in time, you will not be able to keep the house — but you’ll generally be able to delay the foreclosure sale a month or even several months. Any remaining debt to the lender will be wiped out.
4. File Chapter 13 bankruptcy: If you can afford to make the future mortgage payments and the delinquent payments, too, file Chapter 13 bankruptcy. This is different than Chapter 7, in which assets are liquidated but debts are wiped clean. With Chapter 13, you keep your assets and, under court supervision, you repay your debts under a three-to-five-year plan.
5. Short sale/deed in lieu of foreclosure: A short sale takes place when the bank allows you to sell your property even though their mortgage won’t be paid. Be careful — the bank may allow the sale to go through, but only on the condition that you repay the deficiency. In a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. Why might a bank agree to either of these? Lenders spend $30,000 or more to foreclose on a property. Most lenders will consider these options to avoid foreclosure costs.
6. Walk away from the house: Pack your things and leave. The only issue remaining is whether your lender can sue you for any deficiency still owed after the sale, and that depends on the state you live in and the type of mortgage you have. You’d be wise to speak to an attorney before taking this step.
Any sale or transfer of property has tax consequences, including a foreclosure sale or a deed in lieu of foreclosure. Seeing an accountant is probably a good idea, as well.
Here are two options NOT to consider. In other words, they’re scams.
1. Signing over your property title to another company: Some companies say that after the mortgage is current they will re-sign the property back over to you. This rarely happens. Instead, the company is likely to pull out equity, not make any mortgage payments and allow the property to be foreclosed. You will not be able to save the property from future foreclosures because the property is no longer in your name.
2. High-interest second mortgage: When a property has equity, there are companies that will give you a second mortgage, in an amount as high as 70 percent of the equity available. The interest rate could be as high as 18 percent and the fees can be exorbitant. They are hoping that you’ll blow the money and default — which allows them to take the property from you.
When facing foreclosure, you have options, but you need to avoid the scams and act quickly if you want to have the best outcome. Delaying only makes foreclosure inevitable.
Courtesy of Bankrate.com
Creditor insists payment over phone
Posted on January 15, 2008
Filed Under Dave Ramsey | Leave a Comment
Question:
I sent in my final two payments totaling $400 to pay off my car. I had gotten behind, and they had been calling me about the debt. They continued calling even after I’d sent in the payments, and a guy finally told me they had changed their mailing address and I’d sent the money to the wrong place. Then, he got nasty and started demanding that I make the payment over the phone. He wouldn’t even give me the correct address. What can I do?
Jean
Answer:
Never, ever make any kind of transaction like that over the phone with a creditor. Call the bank right now, and put a stop payment on the check you sent to the wrong address.
Next, you need to call these people back and flat out ask for the correct address to send your payment. Chances are you won’t get the same guy, but if you do just hang up on him and call again. You’re trying to make things right, and all you need at this point is information. You don’t have to put up with being verbally abused by this jerk.
Take charge of the situation, Jean. If the phone jockeys continue to harass you, demand to speak to a supervisor and let him or her know that you’re willing to overnight a check to them, but there’s no way you’re giving someone whose been rude, obnoxious and unprofessional electronic access to your checking account!
- Dave
7 ways to avoid foreclosure scams
Posted on January 14, 2008
Filed Under Foreclosure | Leave a Comment
1. Don’t panic. Get detailed information about the deadlines you face in resolving your problems. Pay special attention to the date on which you would lose legal right to ownership.
2. Never sign a contract under pressure. Take your time, and consult a lawyer if possible.
3. Never sign away ownership via a quitclaim deed or other means without consulting a lawyer. Be especially suspicious of offers to lease back your home, in order to buy it back over time. These offers are weighted against you.
4. Never make your mortgage payments to anyone other than your lender. If you can’t pay, do not ignore warning letters from your lender; contact them instead.
5. Beware of any home-sale contract in which you are not formally released from liability for your mortgage. Make sure you know the rights you are giving up and that you agree to give them up.
6. Don’t sign anything with blank lines or spaces; information could be added later without your knowledge and consent.
7. If you do not speak English, never use a “rescuer’s” translator. Instead, insist on using your own translator.
Courtesy of Bankrate.com
Creditors harassing parents!
Posted on January 11, 2008
Filed Under Dave Ramsey | Leave a Comment
Dear Dave,
My older sister has run up some pretty large debts, and there’s one creditor in particular that’s giving her a bad time. She only owes them about $500, but they somehow got our parent’s phone number. They called and made my mom feel so bad that she paid part of the bill. Now this company is calling my parents four or five times a day, thinking that if they’re pushy enough she’ll pay them more money. What can they do?
Donna
Answer
First, your mom and dad should get an answering machine – one that has a memo button that allows them to record conversations. The next time these bozos call, your dad should get on the phone and explain to them that the conversation is being recorded and that they are not liable for your sister’s debt. Let them know, too, that if they ever contact them again about this matter that they will sue!
Your dad also needs to tell them that if they call them again he will file a complaint with the Federal Trade Commission. What this company is doing is a violation of federal law and the Federal Fair Debt Collections Act. If the caller can’t understand that, make them put a supervisor on the line and repeat it. Your dad needs to crawl all over these people, because what they’re doing is illegal, immoral and just plain mean!
Even if he did owe the bill, calling that many times a day is still a violation of federal law. He’s not going to get rid of these people by being nice!
- Dave
