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Credit question?
Board: Money and Investing
Mar 20, 2012 8:39am
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Hey... this question isn't for me, but for a friend who is struggling.

He has several credit cards that he's struggling to pay and lately hasn't been paying them at all. I'm trying to help him get back on track. One of them is offering to settle for half of what's due. Should I push him to do this, or will that be a lot worse in the long run on his credit report? How bad does something like that look?
Re: Credit question?
Board: Money and Investing
Reply to: #685269 by Brandy
Mar 20, 2012 9:07am
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One of them is offering to settle for half of what's due. Should I push him to do this, or will that be a lot worse in the long run on his credit report?

Half of the minimum amount due? Hmm... I'm not sure how that compares with paying the full minimum amount due, but I kind of doubt it'll make much of a difference. Not paying half of the minimum amount due and all of the minimum amount due is a black mark either way. I definitely think it's worth doing everything possible to at least cover the minimum amount due.

If he hasn't done it already, though, I'd suggest he call up each of the credit card companies and tell them he's having trouble with payments and if he can get the interest rates reduced. I've heard that most of them are actually pretty good doing that sort of thing. It still may not be a good rate, but it's better than nothing.

And when there's enough money to cover more than the minimum payments, let the extra go towards the highest interest card first!

-- Ryan
Re: Credit question?
Board: Money and Investing
Reply to: #685269 by Brandy
Mar 20, 2012 11:42am
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Speaking from personal experience, I just went through debt reduction last year and found out when doing my taxes that all the debt forgiven by the credit card companies is counted as INCOME. Just something to think about (basically it means I OWE about $5000 in taxes this year when I usually get back about $2000). And, yes, the credit card companies mostly settled for half of what was owed, but my credit went down the drain. Since my intention was to totally get rid of my credit cards, I'm okay with having no credit. So I guess it all depends on what your friend is trying to do. Credit card companies are willing to work with people as long as they are up front and honest about what is happening. Good luck to your friend.
Re: Credit question?
Board: Money and Investing
Reply to: #685310 by Rydeswitheagles
Mar 20, 2012 12:48pm
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Wow! thanks for sharing that! who would have thought that you would have to pay taxes on money you never saw!
Re: Credit question?
Board: Money and Investing
Reply to: #685269 by Brandy
Mar 20, 2012 12:58pm
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I second Ryan's suggestion of asking the companies to lower the interest rate. He may have to bug them a bit about it though. My best friend went through this years ago when she was put on bed rest during her pregnancy. She's a single mom so she was without income. Since she had been using her savings to make her card payments they didn't believe her when she called to ask for them to lower her interest rate. It wasn't until she had to stop making payments all together that they called her willing to make a deal. Of course you said your friend has already stopped making payments so most likely they will be willing to lower his interest for a specific amount of time. Without being slammed by interest hopefully he'll be able to get a little ahead. Good luck to your friend!
Re: Credit question?
Board: Money and Investing
Reply to: #685310 by Rydeswitheagles
Mar 20, 2012 5:48pm
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Speaking from personal experience, I just went through debt reduction last year and found out when doing my taxes that all the debt forgiven by the credit card companies is counted as INCOME.

That may be true, but I'd still count it as the lesser of two evils. =) Let's say that you can get $10,000 written off of your debt. You can earn $10,000 to pay it off, but you'd still have to pay taxes on that income, so really you might need to earn $13,000 to have enough to pay off the 10K after the tax man takes his bite.

Or, if you can get a credit card company to write off the 10K, you'd still have to come up with the $3000 to pay the taxes on that "income." Overall, though, that only puts you three grand in the hole. It's still a heck of an improvement over having to earn $13,000 to pay it off! I'd take a deal like that in a heartbeat!

And logically, whether you "work" to earn $13,000 and pay taxes, or you have to pay taxes on $10,000 that's written off, it basically amounts to the same thing. In fact, I'm rather glad the government taxes such writeoffs as "income." The person who actually worked to earn $13,000 had to work hard for that money. The person who gets a $10,000 write-off doesn't have to work at all for that "free" income. It seems more fair to tax money that doesn't actually require work to acquire rather than to tax income that requires a lot of blood, sweat, and tears. *shrug* But that's a totally different topic and I'm sure you'll find plenty of people who disagree with me. =) Which is okay--I'm just trying to explain why it actually makes sense to tax that write-off as income. It basically IS income--in the sense that the credit card company gave you ten grand to pay off your debt with. Just because a credit card company gives you ten grand doesn't mean it's not income.

But I wasn't talking about debt reduction (though if someone can get it, by all means, grab it!)--I was talking about reducing the interest rates. Getting your interest rates reduced does not count as income, so you won't be taxed for that.

-- Ryan
Re: Credit question?
Board: Money and Investing
Reply to: #685269 by Brandy
Apr 5, 2012 8:28pm
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I had some issues a few years back that I was able to clear up with the help of conumer credit counseling service I highly recomend at least calling this agency. They are not a fly by night group and not scammers. They negotiate with creditors. You pay ccc, they oay the creditors. One oayment easy to manage and they also offer advice on oersonal budgeting.
Zh
Re: Credit question?
Board: Money and Investing
Reply to: #685323 by Sea Maid
Apr 5, 2012 11:28pm
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Actually you did see the money at some point. After all, this is the reason you owe money to your credit company; you used their money to buy the items you purchased. If they let you get away without paying the full amount borrowed....yes, that is income; income that you have already spent....
Re: Credit question?
Board: Money and Investing
Reply to: #689919 by Erela
Apr 5, 2012 11:33pm
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Sorry Sea Maid, I just realized how my last comment sounded. I meant you in the sense of the borrower who borrowed the money. Not you, specifically, since you are not the one in this situation....