Need some advice on those debt reduction programs

[MacMadame]

Since I lost my job, money has been tight. Now it turns out we owe the IRS $9000 for TY09. I have been getting these mailings for years about debt reduction programs that lower your consumer debt. I have never looked into them because the mailings feel like a scam most of the time -- the way things are worded in particular. OTOH, I know there are legitimate programs out there. Does anyone have an experiences with them?

Note: I don't want to declare bankruptcy and I don't even want to reduce my car loan. It's just my credit cards that are killing us and I feel like the CC companies are taking advantage of us because at this point we've paid about 3x what we've spent to them (or possibly even more) and there is no end in sight because whenever we have a setback and can't make more than the minimum payments, the balances go right back up to what they were before we paid them down.

[skipaway]

I listen to Clark Howard's financial show and he really recommends.

nfcc.org

also, check out his website for very good advice on financial issues.

Clark Howard

He has a scam alert on debt settlement programs:

Debt settlement

[PDilemma]

If you haven't already done so, go through the tax bill with a fine tooth comb.

We received a notice that we owed nearly $4000 for TY2009. We didn't. They owed us $212. Which they payed. With interest.

[barbk]

Second PDilema. It would be very worth it to find a CPA or Enrolled Agent (not an H&R Block type) who would review your returns and the IRS notices. The IRS also has compromise offers that could help in situations where someone has lost their job or had major health issues...

The one thing you can't do is ignore it.

[redonthehead]

We did the debt consolidation thing back in 2002. Mistake! We did pay off the credit cards but when I did it, I took us from being able to buy anything we wanted with great credit scores to over night not being able to get anything. It dropped our credit ratings from the high 700/low 800's to 500 over night. I just wanted to pay them off instead of having that debt hanging over us. As you pay them off, your rating comes back up but we were told it was worse than bankruptcy when we were trying to get a new car.

Most CC companies now though have their own debt reduction programs. Call them and ask what they can do for you before you go with an outside agency. You might be surprised. I know I was with Discover.

[MacMadame]

We can go on a payment plan with the IRS. It's part of the paperwork they sent us.

I'm also going over the taxes now as I assume there were other mistakes. (I know for sure Charity contributions was under reported.)

I didn't know how these programs affect the credit rating. Ours is actually pretty good right now. I don't know if I'd care if they went down for a while. I'll have to think about it.

[Anita18]

We can go on a payment plan with the IRS. It's part of the paperwork they sent us.

I'm also going over the taxes now as I assume there were other mistakes. (I know for sure Charity contributions was under reported.)

I didn't know how these programs affect the credit rating. Ours is actually pretty good right now. I don't know if I'd care if they went down for a while. I'll have to think about it.

I second redonthehead's suggestion of calling the CC companies and seeing if they'll work with you. Really couldn't hurt at this point.

As for credit scores, it'll depend on what you plan on buying in the next 6 months or so. If your credit score goes down, it isn't forever, but it will affect the big ticket items most.

Good luck!

[Cherub721]

Do you own a home and have equity in it? A few years ago my mother did a cash out refinance and used it to pay down all her credit card debt. The interest on the mortgage was much lower than the interest on the ccs, and is tax deductible. That didn't have a major impact on her credit score other than the fact that she took out the loan (her credit score is still excellent and she has had no trouble getting any other types of loans). Now she pays the balance of her cards in full each month except when she has a card that is zero interest for a period of time.

[Garden Kitty]

I think a lot of the commercial ones are a bit of a scam., but I know Suze Orman sometimes recommends CCCS. Here is an interview with them from her site.

Although I might also try to talk to the credit card companies on your own first.

[Aceon6]

Agree with others that the paid "debt help" programs are either scams or give advice that will lower your credit score overnight.

Hold off until you can make sure the 2009 tax return is as close to correct as you can make it. Then, counter offer a payment plan that works for you. As long as you seem to be interested in paying your taxes, the IRS should work with you. Once you know your payment and frequency, you can think about other options.

One thing, make sure your husband's income is covered going forward, either through withholding or quarterly estimated payments.

[MacMadame]

Do you own a home and have equity in it?

We own a home but our equity is negligible. Housing market tanking impacted us but not so we're underwater. We're right about even right now.

[redonthehead]

I second redonthehead's suggestion of calling the CC companies and seeing if they'll work with you. Really couldn't hurt at this point.

As for credit scores, it'll depend on what you plan on buying in the next 6 months or so. If your credit score goes down, it isn't forever, but it will affect the big ticket items most.

Good luck!

It actually affects them for longer than 6 months. Our's has been paid off for over 4 years and our ratings are just now coming really coming back up to where they were.

Also, remember if you do this or if you talk to your cc companies and they work with you to pay them off, as you get them paid off...close those accounts! Your credit rating will take another hit but it's better to have "closed account at consumer's request" on your record than open accounts on it. Another hard lesson learned!

[sk8er1964]

Also, remember if you do this or if you talk to your cc companies and they work with you to pay them off, as you get them paid off...close those accounts! Your credit rating will take another hit but it's better to have "closed account at consumer's request" on your record than open accounts on it. Another hard lesson learned!

I disagree. You should keep at least one open - with the highest limit possible - and don't use it! Well, charge something on it each month, like a small recurring bill and then pay it off each month so they don't close it. The reason being is that one of the criteria for the credit score is debt to possible debt ratio (can't remember how they put it). In other words, the closer you are to your maximum allowable debt the worse it is for your score. If you have an open card with a lot of available credit on it that is a good thing.

[Nomad]

CCCS helped get me out of a debt nightmare several years ago. The whole process took two or three years, I had to hand-deliver a cashier's check to them every month, but they did consolidate my debt and stop the escalating interest rates on the cards I was paying off.

[skateycat]

Agree with others that the paid "debt help" programs are either scams or give advice that will lower your credit score overnight.

Yep, if you do consider any of those programs, check Better Business Bureau, Yelp, and any other reviews or news stories on them.

I have not been in your shoes, and I imagine it is a scary place to be.

See what you think about what Dave Ramsey says about your situation. I think he would say that you are in a place where you need to focus on taking care of the 'four walls.'

The four walls are

food
basic utilities
basic transportation
your rent or mortgage payment.

If you've got those things, and you've got anything left, then you can use the rest to pay credit cards. But if you're in survival mode anyway, the credit cards are the lowest danger thing to leave unpaid. It's not like you don't want to pay them. You'd pay them when you could.

http://freshstartmoneycoach.com/2009/02/09/four-walls/

See what you think.

If your situation is better than that, consider Dave's debt snowball approach. Pay minimum payments on everything, attack the little one with everything you've got left over.

Dave's not for everybody, I have to do a take what I like and leave the rest approach with him, and I don't use his name with my husband. But many of his personal finance concepts have been a) comprehensible to me and b) helpful.

[Anita18]

It actually affects them for longer than 6 months. Our's has been paid off for over 4 years and our ratings are just now coming really coming back up to where they were.

Also, remember if you do this or if you talk to your cc companies and they work with you to pay them off, as you get them paid off...close those accounts! Your credit rating will take another hit but it's better to have "closed account at consumer's request" on your record than open accounts on it. Another hard lesson learned!

Ah, I didn't know that, and I've been lucky enough never to have experienced it first-hand! All I know is that it isn't forever, so people shouldn't obsess over small dips in their credit score. But IIRC it was in the context of hard credit checks or something like that.

I disagree. You should keep at least one open - with the highest limit possible - and don't use it! Well, charge something on it each month, like a small recurring bill and then pay it off each month so they don't close it. The reason being is that one of the criteria for the credit score is debt to possible debt ratio (can't remember how they put it). In other words, the closer you are to your maximum allowable debt the worse it is for your score. If you have an open card with a lot of available credit on it that is a good thing.

I think there are differing opinions on what is better. I have two open accounts that I simply don't use, and whatever credit I DO use (from 2-3 other cards), I always always always pay off the entire balance every month. I'm not sure what would happen if I closed my unused accounts, but my score is excellent. It really surprised my financing guy when I was buying a new car. So it's working for me. I think you just have to find what works for you - obviously having a huge credit limit (seriously, my limits across all my cards is close to half my yearly salary) doesn't affect my usage any, but if you're afraid that having open accounts would tempt you more to use that credit and carry a balance, then close them.

[skateycat]

My local CCCS was very helpful to me when I got unhappy with my credit card situation. They had me write down my income, expenses and debt and then they looked over my situation. They actually suggested that I didn't sign up with their program, that if I stuck to a plan to pay off my debt that I could do it without their involvement. It took me about four years, but I did it.

[Capella]

I tried my local CCCS a loooong time ago and went down to see them and brought my bills and income statements and stuff. The guy looked over everything and then told me that they couldn't help me because my problem was that I didn't make enough money. Um DUH!!! He said that their service was more for people who couldn't manage credit (cards, loans, etc.) rather than someone underemployed. Suggested I call all my bills and explain the situation and that I wanted to figure out how to make things work before I got way behind. Utility companies were really great about finding me a payment plan that was the easiest in the short term (it was summer, so my bill was much higher than it would be in the winter. They did an average of what my address cost over a year and divided by 12 and that became my new payment). I know some credit card companies can put you on temporary plans where they stop charging interest so that everything you pay goes towards principle (of course you can't use the card during this time).

Especially with this recession, creditors know people are struggling and a lot of them have programs that aren't advertised to help people though short- and medium-term struggles. You just have to call and ask.

Good luck and I hope things turn around quickly for you!

[MacMadame]

YI think he would say that you are in a place where you need to focus on taking care of the 'four walls.'

Did he say what to do if you can only take care of 3 walls?

I think he has some good ideas but I think my best bet in the long run is to get a new job. Then none of this will be a problem any more.

[slicekw]

MacMadame, I'm sorry to hear your problems, I hope you get through it soon.
Consumer Reports has always advised to use a nonprofit credit consolidation group. The names have all changed since the last time I looked at it.

Here's a federal site on it...
http://www.ftc.gov/bcp/edu/pubs/cons...dit/cre19.shtm

It points to here, which is a useful site for all of us:
http://www.ftc.gov/bcp/edu/microsite...ers/index.html

Good Luck.