And Now For The Questions of The Day
Sherrie Asks…
Q: What are the advantages and disadvantages of using a debt settlement company?
A: Debt settlement has received confusing press over the past few years.
With the limit of effectiveness of credit counseling debt management plans, debt settlement can be a great tool to use to avoid bankruptcy. But it does not come without consequences.
Deciding on settling your debt is often a difficult choice. There's so much sales and marketing message out there it is hard to tell what reality is. The primary confusion I see people struggling with is trying to resolve their financial situation through debt settlement but trying to protect their credit at the same time. It can't be done.
There is no solution that I can think of that would allow you to pay back less than you owe without some credit report pain. So, if you accept that you can have negative marks on your credit report as a result of debt settlement, great. If not, pay the bills in full.
Settling a debt, or paying it off for less than you owe, will quite possibly result in two outcomes. The first is that the amount of debt not paid back and written off will probably be reported as a negative item on your credit report. Secondly, if the amount of debt forgiven is more than $600 and you are not insolvent, you will probably have to pay taxes on the forgiven debt, just as if you had received it as income. So don't forget to factor the tax bill into your calculations about what you can really promise to pay.
There is a great free publication that you can download from Myvesta.org titled Beware of the IRS if You Settle or Default on a Debt.
The advantages of debt settlement are that if you have funds to settle you can resolve your past financial problems once and for all without bankruptcy.
The disadvantages are that it will result in credit report marks, you may have a big tax bill, and I've seen lots of people settle on one debt but not have a plan for the others and still have to file bankruptcy. Debt settlements are a good tool as part of a larger solution.
Mindy Asks…
Q: I have a house and it is worth about 650,000 now but I used max-line of credit from that house and I have about 40,000.00 credit card debt. I am working now and make about 3500.00 per month. Recently my husband started a new business and we put a lot of money in that business, because we can see the vision from that business, but now I'm struggling month to month what can I do?
A: Mindy, The problems you are facing today are the result of decisions and choices you made in the past. It sounds like you are reaching your financial judgment day.
You've maxed out your home equity, you owe a lot of money to the credit card companies and your husband has started a new business that is not making money yet. If you throw in an egg and some water, you got a recipe for a financial disaster.
If you want this pain and stress to go away, you'll have to live within your income.
Tina Asks…
Q: Dear Mr. Rhode:
I am not sure if you can assist me. My family and I have fallen on bad times including a serious health condition in the past few years. We are young with a young son. I have accumulated approximately 40 Grand in credit card debt with interest rates going up. I am not late on anything but almost all my student loan monies goes towards my minimums. I am currently a Ph.D. student with 4 courses and dissertation left. To close to give up at this point, nor do I want to.
In 1982 there was a UGMA account set up for me. I was unaware of this account and in 1994 my parents came to me with a signature card stating they were adding me to an account. This was not unusual as I am an only child and was frequently added to accounts including my fathers business accounts so I could sign checks in his absence out of the country. This signature card was taken from Merrill Lynch in another state and sent back. In 1996 when I found out about this account I inquired with Merrill Lynch was told that it was now Joint with Rights of Survivorship requiring both signatures. I was not told what a UGMA account was other then it is set up when kids are minors.
I went to a BK attorney to explore options since I wish not to file for BK and that is when I learned the account was to be turned over to me at age 21. When I inquired about the account at Merrill Lynch I was told where my account was, how much was in there and we are now talking over 1/2 million and that I had confidentiality but needed to speak with the advisor who handled the account and she was not in. Before returning my call she called my parents which I was told would never occur. They then took the account out of my name and she called me back informing me that I never had an account, the account was not mine, they did not have a signature card on me and that Merrill Lynch is required to contact the minor at age 21. She said at no time could a custodian take the account away. Then she asked me a lot of questions. Unknowing to me she was sending them to my father who was never on the account all the information I gave her via E-mail. Since she was unwilling to help me I called their investigation department and reached someone who was willing to help me, found my account and had it changed back to joint status but I still cannot take out the funds.
Since then the advisor contacted me saying she had to talk to my dad and then backtracked her statements on my machine because I refused to talk with her after she found out I contacted her compliance manager to stop her. She is still employed and managing the account even though I requested until the investigation is over for her not to have any involvement. That has been denied. I have reported her to the NASD. At this point if she is doing this to me then she is doing it to others.
They want a conference call tomorrow with my parents that I will not participate in because I was not given the opportunity to have my attorney involved.
Merrill Lynch refuses to release the funds based on my signature and they do not care that I was never told by anyone that the account existed more was I required to come into a branch to sign the card. They also do not seem to care that this was done in a state which we do not live in.
I have a tumor on my Pituitary gland, not only will this monies allow me to get out of debt but it will allow me to leave it to my six year old son when I pass since there is a very good chance that I will pass before my mother.
I know I was ignorant in signing without knowing and trusting my parents but I truly was unaware of the account and my father did my taxes until I was married.
Mr. Rhode, I have caused a lot of chatter at Merrill Lynch which they do not seem to care for but I am still not getting what is rightfully mine. Is there anything that I can do at this point that I have not already done? I have been advised not to go to court with my family by a top notch attorney.
Thank you for your assistance.
Sincerely,
Tina
A: Tina, Rather than fight the battle long distance through intermediaries with your parents, why don't you just go, sit down with them and have an open and honest communication about the situation. It would be interesting to learn from them what their intention was in originally setting up that account for you.
As I see it the signature card stuff is merely a technicality, you need to solve the real problem of why your parents don't want you to have it. Until you can get your hands around that it sounds like a lot of aggravation is being created in other peoples lives because you and your parents don't communicate.
Linda Asks…
Q: I AM RETIRED WITH 18,000 IN DEBT WHAT DO THINK ABOUT MY WITHDRAWING MONEY FROM MY 401K TO PAY OFF MY DEBTS. IT WILL BRING MY BALANCE DOWN QUITE A BIT BUT I FEEL LIKE THE RELIEF TO HAVE NO CREDIT CARD DEBT WOULD BE MORE THAN WORTH IT.
A: Linda, on principle I am not for taking money out of a retirement account to pay towards debt unless it can be spent without risk to the future and it completely resolves the total problem.
It sounds like taking the money out may reduce your stress and worry about the debt but that isn't necessarily the best reason to do it. You should speak to a bankruptcy attorney to learn about what options and protections you may have under bankruptcy. At your age and situation it may make better financial sense to file bankruptcy to discharge your debt and protect what little retirement savings you have, unless you like the taste of dog food.
Your Money Coach For Comfortable Success,sm
