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When to turn down debt-settlement offer

Dear Debt Adviser,
I am 32 years old and have some old debts from credit cards I took shortly after college. I have tried several payment plans, but life always gets in the way and I end up back at square one. Two of the credit cards are with the same company and the third is in collections. The company that I have two cards with has offered me an "out," saying that they will accept 60 percent of what's owed, provided that amount is paid over three months. How will this option affect my already mediocre credit? Will making regular payments over a longer period be a better option? Now that my finances are in order, I would like to start excising the debt demon but need a starting point. Thanks.
-- N.L.

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Dear N.L.,
Excising demons is a tricky business. Debt demons are no exception. If you don't do it right, you'll be haunted for years! Three cards and two companies should be a manageable task. If you had more creditors I'd consider sending you to a credit counselor. But at 32, you should be able to do this on your own.

If your finances are now in order as you say, don't settle. The effect on your credit score and report will be substantial and you will also probably have to pay income taxes on the 40 percent that is forgiven in the bargain. Your credit report will reflect the settlement for the next seven years.

Too many people overlook the consequences of an unnecessarily negative credit report. For instance, in the next seven years, is there any chance you will:

  • Look for a new job?
  • Move to another apartment?
  • Buy a home or car?
  • Buy insurance?
  • Get married?

If the answer is "yes" to any of these questions, your credit history can come into play.

Many employers review credit reports as part of the hiring or promotion process. Competing with others is tough. With a history of not being able to meet your obligations (as in unreliable or out of control), you will be at a disadvantage. Chances are no one will ask you why, they'll just go on to the next candidate. Employers can't get sued for not asking questions. The same applies to renting an apartment. Will you pay the rent or 'settle' with the landlord? Who needs tenants like that? Buying a house, car or big-ticket item will cost you more and require a bigger down payment. Insurers love numbers and love it even more when you give them a reason to charge higher rates. And finally, my experience is that desirable partners want other partners who do what they promise, work hard to meet obligations and don't come with bad credit for a wedding present. How will he or she know? If they read my book "Credit Repair Kit for Dummies" that just came out, they see that financial issues are the leading cause of divorce and showing each other your credit reports makes good premarital sense.

Making regular payments to all three cards with a plan to pay them in full, in a set amount of time, is your best option if you can get the creditors to agree with you. To keep life from getting in the way, you will need a plan. Whatever you come up with, be sure you can stick with it. Track your expenses and see where your money is going. Cut out any extras that you can and try to set aside a little in savings each pay period. Starting an emergency savings fund is the No. 1 thing that will help when life happens again.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Money Management International Financial Education Foundation and the author of Credit Repair Kit for Dummies. Visit MMI for additional debt advice or click here to ask a debt question.

Bankrate.com's corrections policy -- Posted: Dec. 30, 2005
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