You’ve probably seen and heard the commercials about “The secret the credit card companies don’t want you to know?”
Intriguing isn’t it? If there were some way to snap your fingers and make that credit card debt disappear wouldn’t we all want to try it?
The announcer’s confident voice carries such an air of authority he’s got to know what he’s talking about, right?
They hope you’re moved to pick up the phone and call right away.
Before delving into “the secret” let’s look at some basics for people saddled with growing credit card debt. Companies offer various methods to deal with lots of credit card bills. They may or may not work depending on the circumstances. So, before understanding the big secret here are some definitions.
Under this concept, in a perfect world, the company you hire puts all of your credit card debts together into one payment. You pay the consolidation company a certain sum every month. The allure is that the one payment to the company is less than the total of all the bills. They say they work out some deal with each company through their bargaining power as a known entity that does this, and you save money.
This presents a great idea. It makes a good sales pitch. The problem in the experience of many of my clients is that the consolidation people rarely deals with all of the credit cards. They deal with the easy ones, pocket your money, and you end up with some of the same credit card debt that you started with.
Some companies out there offer to “manage” your debt. You can probably do this yourself on paper or the computer by creating a spread sheet, listing all due dates and amounts due. Actually, looking at your overall situation might make things more clear. The problem when you hire a company to do this for you often rests in the fact that you pay them to do the spread sheet. Their fee does not include you having to pay the managed payments. Unless totally disorganized, this task is best handled by you yourself.
Debt settlement implies that the amount you owe is reduced to a final number that you pay. The idea is that the credit card company might rather “settle” for a lower amount rather than wait forever in the unlikely chance that you will pay the entire unmanageable amount. Especially if you’re threatening to file bankruptcy, the company might figure getting something out of you is better than having the entire amount discharged.
One big problem with debt settlement is that the amount that is reduced is seen as income by the IRS. In other words, you pay tax on the amount of the erased debt. Whether or not the settlement company sends you a Form 1099, which they should.
While debt settlement above involves a reduction of the amounts outstanding, outright debt forgiveness does just that. Forgiven debt simply goes away entirely. Again, to the extent to which a debt is reduced, the IRS sees this as unearned income. The law requires you pay taxes on that amount.
Resolution and debt settlement often offer similar if not the same service. Debt resolution companies gather up all information on everything you owe. Promising you that they are experts, they’ll then either actually negotiate with your creditors or tell you that this is being done. Debt resolution offers the promise of “resolving” all of your debts whether settled in part, forgiven or sometimes paid off in full over time if the balances are low.
Some companies may offer various advice on how to deal with your mounting credit card debt under this name. But, “Credit Counselling” is the legal name of a mandatory class people must take before they file bankruptcy. Nonprofit budget and credit counselling agencies provide this. Their certification comes from the U.S. Trustee program which oversees the bankruptcy process. If you’re good on the computer, the class can be done over the internet. If not, the “counselling” also comes over a toll-free telephone number. After successful completion of the class, which most people can do in under an hour, you get a credit counselling certificate. Under bankruptcy law you must have this certificate before filing bankruptcy.
With the exception of true credit counselling under bankruptcy law, the lines sometimes blur between the other concepts. Don’t let the companies claim “oh no that’s not what we do at all” then give you a line of nonsense.
What is the secret the credit card companies don’t want you to know?
No drum roll required here. Just like a recipe, take a pinch of all of the above ideas, except for credit counselling, throw them together and you’re off to a good start. Except, the real secret comes here. If you simply stop paying your credit cards, and you do not pay them for a long time, alarms go off at the credit card company. As a result, in addition to the nasty collection letters and calls you might get, the company has a few options. One option some credit card companies offer is a “settlement”.
If you retain a company to pursue this option, they ask you to stop paying credit cards and pay the company instead. They might require automatic electronic payments. As they sit and collect your money, they hope the credit card companies give in and offer a low settlement.
If a lower debt settlement offer comes in, the settlement company brags about what a great job they’ve done for you. But that money they’ve been collecting from you usually is not applied to the lower debt settlement. Usually that is their fee. More often than not you pay the debt settlement yourself.
In the experience of my clients, who end up filing a bankruptcy when this scheme fails, not all of the credit card companies offer a settlement. Contrary to popular belief no law requires this. The settlement is simply a practice they sometimes follow.
Another problem with this scheme occurs when your credit report shows late payments, charge offs and other damaging information that happened while you played the waiting game.
Finally, remember that to the extent that some of your debt is reduced you now have to pay taxes on the amount forgiven.
“But that’s not all …”
Ever notice hard sell telemarketers love that phrase? But there truly is more to the story. The above “secret” isn’t the only thing hidden from you at first that you very well might run into if you follow these schemes. Unless you read the small print in the agreement, they send you, or on their web sites, here are four more secrets:
- They do not stand behind their own product with language such as “You understand and acknowledge that no specific results can be predicted or guaranteed.”
- As you play the waiting game “creditors may continue to pursue collection efforts on delinquent accounts”.
- Failure to tell you up front what we have about your tax liability on forgiven debt. Instead they use words in the fine print such as “we highly advise you consult with your tax professional”.
- The other “secret” language hidden in the fine print often cautions: “We do not guarantee that your debts will be lowered by a specific amount or percentage or that you will be debt-free within a specific period of time.”
The Big Secret vs A Known Entity
Bankruptcy presents a big decision. In the free initial consultations offered by my office we review options and never attempt to persuade anyone to file bankruptcy. But there are unknowns and delay in following “The Secret” approach. For the most part a usual no-asset Chapter 7 Bankruptcy is over in four months or less. Many of our clients have attempted the above approaches, only extending the hardship brought on by unbearable debt. As a result, they end up filing bankruptcy anyhow.
The author of this article, Attorney Andrew D. Myers, represents consumer bankruptcy clients in New Hampshire and Massachusetts. The Law Offices of Andrew D. Myers handles Chapter 7 and Chapter 13 bankruptcy cases, always offering a free initial consultation.
More information on rebuilding credit after bankruptcy.
More about pre-bankruptcy credit counselling.