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Ask Farnoosh: When Does Debt Settlement Make Sense?

Farnoosh Torabi

Anonymous: I would like an honest opinion on how debt settlement and debt management works. I hear that with debt settlement the debt gets "written off” and is put on your taxes as income.

I agree there’s confusion about the differences between debt settlement and debt management. While both methods offer consumers debt relief, their approaches differ, as do their credit and tax implications.
In short, debt management is (in general and in my opinion) the better option for consumers saddled with debt. These types of programs are typically run by non-profit agencies like the National Foundation for Credit Counseling and Money Management International, with the intention of helping you “manage” your debt until you become debt-free. After a one-on-one counseling session they’ll decide if you need to enter a debt-management program, in which a counselor works with your creditors on your behalf to restructure your debt and make payments more affordable through interest-rate reductions and the elimination of fees and penalties. Costs vary but are much lower than what you’ll face at settlement firms. For example, at the NFCC’s more than 700 locations, the initial session is usually free, though in some areas it can cost around $20. Once you’re enrolled in a debt-management program, you’ll pay roughly $25 a month, plus a one-time set-up fee of $30. If you’re in a real financial bind, ask and the NFCC may waive these costs.  
Similar to debt-management agencies, debt-settlement firms negotiate with your creditors for more affordable payments on your credit-card and other unsecured debt. Their approach, however, is different. It typically involves stopping payments on your debt and making lump-sum settlements to your creditors; the payment amount can range from 30% to 70% of your total balance. For example, an agency may negotiate with your credit-card company to have it settle a $20,000 credit-card bill for a one-time payment of $6,000 or $10,000. It’s a quicker fix (assuming you successfully complete the program), but will cost you in other ways.
First, debt-settlement companies charge excessive fees, including a front-end fee of up to 15% of the debt you’re aiming to settle. That fee is only to be collected once the company’s provided positive results (i.e., renegotiating the terms of your debt). This was a rule set up by the Federal Trade Commission a few years ago, though some companies are ignoring the law.  Along the way, you may face a monthly service fee of $50, and once a full settlement is reached with your creditors, the firm may tack on an additional 20% contingency fee based on the amount they saved you.
Also be aware of the potential tax liability. According to the IRS, any debt that’s settled or cancelled in the amount of $600 or more is considered taxable income. The one exception is if you’re insolvent, meaning your liabilities are greater than your total assets. In that case, you may be able to avoid the tax burden.
Finally, the credit implications of debt management vs. debt settlement are vastly different. With debt management, given that you eventually pay off all of your debt, creditors report the payments to credit agencies as being on time and in full, bearing virtually no impact on your credit. With settlement, however, records may show the debt was "paid by settlement,” which not only has the potential to damage your credit score, but it could hurt your chances of securing additional credit down the road.
Bottom line: If you’re struggling to pay your bills and make monthly payments toward your credit cards, consider working with a credit counselor first who may recommend that you enter a debt-management program. Debt-settlement firms should only be considered as a last resort. But even then, remember you don't need a costly middleman to ease your debt load. You can always directly negotiate with your creditors by asking for reduced interest rates, elimination of fees and other modifications to help you make payments more affordable. 

If you want to learn more about a particular debt-settlement company, check their Better Business Bureau ratings and get acquainted with the FTC’s updated laws regarding settlement companies to make sure they're following the rules.
Anonymous: How do you negotiate a raise when you are hourly, not salaried? Also, at what point do you negotiate salary once you have received a job offer?
How you get paid – whether by the hour or salary – matters little when making a pitch for more money.  As long as you’re providing value and your work has been contributing to the company’s bottom line, it’s totally fair game to discuss yours.   
For new hires, the best time to negotiate a salary bump is immediately following the offer but before you accept. “At this point, you know that they love you and even though they may have somebody else lined up if you say no, you are their first choice. This is the moment you can push for the top of the range of expectations,” says communications consultant Mark Jeffries.
As for how to negotiate, go into the meeting armed with some knowledge of what others in your position or similar are earning at the company or across the industry. Sites like Glassdoor and PayScale offer free salary reports of specific positions. The data should give you a frame of reference, and help you avoid overestimating or underestimating what you should get. “You don’t want to be caught off guard or unprepared to negotiate,” says Nicole Williams, author and LinkedIn resident career coach. While there’s no formula for pinning down the perfect pay bump, Williams suggests asking for a raise based on your performance track record.  “Consider what you’ve contributed to the [company’s] bottom line. If you brought in $100,000 of revenue, that justifies a raise of $10,000,” she says. Or, if you’re making $15 an hour and have successfully taken on additional responsibilities since you began working a year ago, asking for a $2 or 10% raise to match your updated role is fair.
Finally, a negotiating tactic for all workers – new or old, hourly or not -- is to figure out your replacement cost, which could equal thousands of dollars. “Try to calculate what they would have to pay to replace you, plus the amount of hassle, time and possibly recruitment agency fees that they would have to fork over should you walk out,” says Jeffries.
If you’re willing to walk because of another job prospect, your chances of getting that raise become even better. “Employers always suffer from the jealousy effect -- as soon as they discover that somebody else wants you, they want you more,” says Jeffries.  “It's a bit like the dating world in that respect.”

Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com