Sunday, 09 October 2005

A friend asked me the other day about credit counseling, because she's trying to get her financial life squared away after some hard times. I figured this was a good place to put down some related thoughts, even though it's not tech-related. It's an important topic for many. You have to be very careful these days what you're getting yourself into, especially now that the new federal "Bankruptcy Abuse Prevention and Consumer Protection Act" is about to go into effect (November 17th). The act requires participating in some form of credit counseling (no one if sure what that means yet, of course) before one can declare bankruptcy. It also changes who can file which forms of bankruptcy based on median income levels, ability to pay and other factors. It's probably a good thing, but the whole credit counseling requirement is a potentially confusing and fraudulent mess.

The problem is this - While the "consumer credit counseling" industry has many worthwhile players, it is also plagued by a whole slew of useless, harmful and downright fraudulent thieves. Not all companies that offer "credit counseling" are legitimate. When it comes down to brass tacks, if you owe someone money, you owe the money. Negotiating settlements is always a possibility, but you do so at a cost, and unless an organization has a program to work with you to change your financial habits and learn how to budget, it's a big waste of time - and potentially a rip-off in the making.

Chances are very good that any company that promises to "repair" your credit score/record, when the entries that appear in your credit report are accurate and valid, is counting on the possibility that you're a sucker and is trying to take advantage of your emotional situation. Unfortunately, these rip-off businesses charge people who are already in financial straits serious amounts of money for a service and promises that they almost certainly can't deliver on. Don't do it.

Only false information can be reliably removed from a credit report, and even that often takes a bit of effort and a chunk of your time. If you want to "fix" your credit, there's one way to do it: Pay off your debts, pay the bills yourself (firms that offer to make payments for you are notorious for being late, which shows up as a black mark on your credit report), and make all of today's and tomorrow's payments early or on-time. It takes an extended period of time (like as in months or years) for a credit score to improve, and there is no overnight repair possible when you've made bad financial decisions. It sucks to hear that, but it's the truth. Most people who end up in credit hell are also the people who can't stand the thought of putting a few years of effort in to improve their situation. They want results right now, or in the very near future. Sorry, it doesn't work that way. Come to grips with that fact and accept that you can start making a difference today and see some very real long-term results down the road.

Most importantly, don't fall prey to "credit repair" and "credit counseling" companies that want to take your money up front and make promises they can't deliver on. Check out any companies you think you might want to work with in depth and before you engage them. Non-profit organizations are out there to help, but unless you're careful it might be difficult to tell them apart from the sharks. Don't fall prey.

NOTE: The United States Dept. of Justice has a list of approved credit counseling agencies by state. They also have information online about choosing a credit counselor.


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Friday, 09 December 2005 13:06:49 (Pacific Standard Time, UTC-08:00)
Thinking of Settling with the Creditor? Read This….

IF you offer to settle a debt with a creditor or Collection Agency, the terms will be "Payment for deletion of trade line. No agreement to that, no agreement at all." With that in mind, there are lots of things you should look into before you offer to settle. These are:

1. Is the debt outside the Statute of Limitations for Collection in your state?
2. How close to the 7 year FCRA Statute of Limitations is it?
3. Are you Judgement Proof?
4. What does the creditor know about your place of employment?
5. Do you presently have garnishments on your paycheck?
6. What is your total financial picture? Are you just postponing an inevitable bankruptcy and throwing good money after bad?
7. Are there any FCRA, FDCPA or FCBA violations committed by the Creditor or its Collection Agency?

Let's discuss each of these, one at a time.

1. Statute of Limitations on Collections: This is a no-brainer. The Statute of Limitations on Collections (SOLC) starts with each payment you make, and ends after a set period of time where no payment is made. If you don't make a payment in a certain time, and the creditor has not started a lawsuit, the law states that the SOLC is an "affirmative defense" to any lawsuit that may be started after the SOLC expires. Why? The US Constitution guarantees a speedy trial. Over time, records get lost, witnesses die, move away or forget. The SOLC basically says to a creditor "Sue while the records are available, otherwise forget it". An Affirmative Defense doesn't mean you can't get sued, but it provides a good reason for the Court to refuse to give the creditor a Judgement. If the debt is outside SOLC, then the creditor cannot get a judgement, and you can stand firm in your offer of "no deletion, no money". NEVER try to negotiate a settlement if SOLC has not expired, ESPECIALLY if the creditor is not actively dunning you. Let the sleeping dog lie until it has no teeth left to bite you with. EXCEPTION - see #3 and #7 below.

2. The Fair Credit Reporting Act places a limitation on the time that derogatory information can be reported. I will call that the SOLR - Statute of Limitations on Reporting. This limit is generally 7 years. There are some exceptions (Chapter 7 Bankruptcy is 10 years and certain other types of situations have no SOLR). If the debt is near SOLR and SOLC has expired, there is very little the creditor can give you in return for payment, since you cannot be successfully sued and the law will remove the line from your credit file shortly. If you have a couple of years on SOLR and SOLC has expired, then you may want to see what you can negotiate. My rule of thumb is this - the debt is worth about 10% of its face amount for each year left on SOLR.

3. If you are Judgement proof (doesn't mean you can't get sued, means there is no way of collecting on the suit) you should explore how likely you are to become "not Judgement proof" before the SOLC expires. If you are not likely to become Not Judgement proof before SOLC expires (say you are a Stay at Home Mom for the next 15 years) then settlement is a possibility, whether the SOLC has expired or not. THIS SHOULD BE APPROACHED VERY CAREFULLY IN COMMUNITY PROPERTY STATES. Only treat non-community debt as outside SOLC. Community debt should still be treated as within SOLC. See my post "Making Yourself Judgement Proof"

4. It is very hard to garnish a paycheck you can't find. Contrary to popular belief, non-government creditors do NOT have access to Social Security files. Treat Child Support as a Government Creditor because of New Hire reporting requirements. So, if you recently changed jobs (and even better, residences also) then you are in a stronger position to negotiate a settlement. Obviously, do not disclose your new employer. It might be wise to let the debts lie for a year or so (and don't apply for any new credit - when you open a bank account, DO NOT GIVE THAT BANK YOUR NEW EMPLOYER - it will go STRAIGHT to the Credit Bureaus since most banks run credit checks on new depositors). A debt, like fine wine, gets easier to settle the older it gets.

5. A garnishment on your paycheck, as unpleasant as it may seem, can sometimes be a blessing in disguise. That's because for OTHER creditors to collect through Garnishment, they have to wait in line until all prior garnishments (in order received by your employer) are paid in full.

Here's a true story. When I was a Credit Counselor for CCCS, I had a particularly intransigent creditor to deal with. The debtor, however, had enough garnishments on his paycheck to amount to about 15 years wait. I merely informed the creditor of this and said "I will pay those creditors who will accept the program and not sue. You have a choice - get paid now or sue and wait 15 years to get paid." You can adopt this strategy also. So, if you have, or will have, a large balance garnishment on your paycheck, and you can live with that garnishment, you have some powerful leverage with all the other creditors you may have. Take this now and be happy with it or wait a couple of years......

6. Will this settlement make you able to pay all the rest of your bills or is it just to "grease the squeaky wheel"? If it's grease, then consider a Bankruptcy - it may be inevitable, and paying this creditor may be at best a preferential payment the creditor will have to share with the other creditors in a Bankruptcy, or at worst just throwing away good money that you can use to retain a good bankruptcy attorney.

7. One of the best ways I have found to arrange a settlement with an intransigent creditor where the debt is not outside SOLC is to COUNTERSUE when they sue. If the creditor (or CA) has committed any violations under Federal Fair Credit Billing Act, Fair Credit Reporting Act or Fair Debt Collection Practices Act, a countersuit for those violations changes the whole nature of the suit.

If you don't have any of those violations, read the article "Turning Your Creditor's Law Suit into Cash for You". The goal would be to drive your creditor's costs of litigation so high they will pay their lawyer more than the lawyer will ever collect from you. SOMEONE, SOMEWHERE in the creditor organization will eventually figure that out and agree to a settlement.

Settlements have their place in credit repair, but should only be negotiated when you are in a position of strength, not weakness. That is the way to obtain the most favorable results possible, or at least not to LOSE anything if a settlement cannot be reached.


** Be sure you consult your accountant before using these tips *** (legal garbage I have to say)

Tax Code says that cancelled debt is income taxable to the debtor, EXCEPT in certain circumstances.

One of those circumstances is Disputed Debt. Make sure in the settlement contract that you insert a paragraph something like this: "Debtor disputes, and creditor acknowledges as disputed, the unpaid and cancelled portion of the debt claimed. Debtor is only paying the undisputed portion of the debt claimed."

If you recieve Form 1099C Cancellation of Debt, here's how to handle it(from an Enrolled Agent):

1. IF the 1099C was as a result of the debt being cancelled in Bankruptcy, attach Page 1 of your petition to your tax return with a note that the cancelled debt income is excludable from income under IRC 108(a).

2. IF, after the discharge of indebtedness, you are still insolvent (liabilities exceed assets) then attach a simple balance sheet to your tax return and claim the cancelled debt excludable from income under IRC 108(a)(1)(B).

3. IF you followed the advice I posted on these boards many times and included in the settlement documents a statement that you are only paying the undisputed amount and the unpaid amount is disputed and the creditor acknowledges the dispute, then attach a copy of the Settlement agreement to your tax return and claim the cancelled debt as excludable from income under Zarin v Commissioner (916 F2d 110 - 3rd Cir, 1990).

4. IF the debt is a purchase money debt and you were able to negotiate with your creditor a statement that the portion paid represents an Adjustment of the Purchase price of the goods bought, then attach that statement to your return and exclude the cancelled debt income under IRC 108(e)(5).

5. IF the cancelled debt is a student loan forgiven or partially forgiven because you worked in certain professions under an acknowledged forgiveness program, attach a note saying this and exclude the debt forgiveness income under IRC 108(f).

6. If none of these applies, include the cancelled debt as OTHER INCOME (Form 1040 Line 21).

If you need or are looking for more information, then go to or email me, Jae Burnham, at
Jae Burnham
Sunday, 19 February 2006 14:32:21 (Pacific Standard Time, UTC-08:00)
HI, I enjoy reading your site. I am trying to find the article “Turning Your Creditor’s Law Suit into Cash for You”. Where would I find this? thanks.
Tuesday, 02 May 2006 07:44:31 (Pacific Standard Time, UTC-08:00)
this article provides a review of this credit counseling company called "delray credit counseling"

"Delray Credit Counseling is a non-profit educational service that offers a variety of financial educational services. Ranging from non-profit free credit counseling, debt consolidation, budgeting, understanding credit reports and scores as well as understanding credit card charges."

is this company legit? their url is

is it also backed by the government?
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