2205 Miguel Chavez Rd., Suite A, Santa Fe, N.M. 87505
Tami Schneider, Attorney
Santa Fe, New Mexico
Debt Consolidation pitfalls
Before coming to see me, some people waste thousands of dollars attempting debt consolidation, trying to save their credit.
Your credit score goes down while you are completing a debt consolidation plan. Your creditors are paid off one at a time. While the first creditor is being paid, all the rest are reporting no payments each month to the credit reporting agencies. It can take years to complete a debt consolidation plan, while your credit score keeps dropping.
Some debt consolidation companies pocket your first 6 months or more of installment payments, as their fee. Your creditors never see this money.
The debt consolidation company may not tell you that one of your creditors refused to do business with them and is not included in your plan. Debt consolidation works by paying off your creditors one at a time. Because you are usually told to ignore the bills in the mail, it can take until the end of the plan before you realize that one of your creditors was not included. Sometimes you may find out earlier, when you are served a summons and complaint.
The debt consolidation company will probably not tell you that the debt consolidation plan has a negative tax consequence. Forgiveness of debt is a taxable event. When a creditor agrees to waive some of the money you owe, they will issue you a 1099-C for cancellation of debt. You will be taxed on the forgiven amount as if you earned the forgiven amount. While the entire debt could have been discharged in bankruptcy, the tax obligation incurred through the credit consolidation plan cannot (with limited exception). Be sure to consult your CPA before signing on to a credit consolidation plan.
Some debt consolidation plans have you pay debt that is too old to be legally collectible. A national debt consolidation company may not be familiar with the various statutes of limitations (time limits in which to sue) in New Mexico. New Mexico’s statute of limitations for open accounts, such as credit cards, is four years from the date of the last item. The New Mexico statute of limitations on written contracts is six years. If a new partial payment is made after the expiration of the six year statute of limitations on a contract, you have just given the creditor six more years to sue you.
You may have a right to remove old accounts from your credit report using the Fair Credit Reporting Act, without having to resort to debt consolidation or bankruptcy.
Some internet debt consolidation companies do not legally exist, as they are not registered as a LLC or corporation with any state corporation commission or secretary of state. A fake company is likely to disappear with your money.
Chapter 7 Bankruptcy is often the cheapest, quickest and most certain solution to debt problems.
Attorney Tami Schneider settles single debt accounts, when appropriate. A settlement agreement ideally should specify that the settlement is for full satisfaction of your debt, even if you are paying less than the balance due. The goal is to avoid a charge off appearing on your credit report and avoid a 1099-C.
Tami Schneider defends debt collection lawsuits. A dismissal with prejudice of the lawsuit against you can be used to remove a negative account from your credit report.
Under certain circumstances a Default Judgement can be overturned.
The information provided herein is general in nature and not intended as legal advise for your particular circumstances.