How Can I Delay Debt Negotiation and Use My Tax Refund to Settle Debt?
Thanks so much for providing such a fantastic resource for the DIYer. I have read thru the Debt Settlement process & have a few additional questions. I also want to make sure I do this right & need a little additional help figuring out timing & prioritizing creditors.
This is what we have going on:
1. Care Credit (GE Bank)
Total Debt: $382.00
Last payment 8/8/13
Already assigned to Allied Interstate Collections
2. Citibank
Total Debt: $1152.14
Last payment 7/15/13
They actually sent me a settlement offer (due 12/15) for 50%.
3. Capital One #1
Total Debt: $904
Last payment: not sure? Was originally an HSBC card but then Capital 1 bought it from them in either June/July.
4. Capital One #2
Total Debt: $2189.35
Last payment: 7/23/13
5. Home Depot (the biggie)
Total Debt: $6070.70
Last payment: 8/5/13
I was laid off 1.5 years ago & was eligible for unemployment until 8/13 when my benefits ran out due to EUC being shut down. While I was getting unemployment, I was able to make the payments & attempted to pay down my debts. Since my last unemployment check it has been a major struggle to pay these debts & paying for our home, utilities, & food. My husband also has a small side business that he has been able to contribute money towards our debt but it isn't regular. We also had a baby in June & accrued medical debt so we have been over our heads in debt that we can't afford to pay each month.
I recently found out that I am eligible to collect about 3 weeks of unemployment this month because our state re - instated EUC tier 3 for this month only. I am estimating on receiving about $900 from that which I would like to use to help settle some of these debts. I am also estimating that we will be getting a tax return this next year so I wanted to use that money to hopefully settle the remaining accounts.
How do I pick which one to settle first? Do I need to get a settlement in writing from the credit card company too?
What order should I prioritize these debts? Is it too early to start calling & asking for settlements or do I need to wait a month or so? I was hoping to wait until January so I have a better idea of what my tax return would be. Is that going to be too late? Any advice would be super helpful. Thanks so much for your time!
—Liz
Depending on when you get your tax refund, some of the debts you listed can be best timed for negotiation right around the time you get that money. Even if you do not file early, if your tax refund is enough to fund all settlements, and especially the Home Depot card, you will likely be able to minimize risks, and maximize your savings with your settlements.
How to prioritize credit cards to settle.
The 900 dollars you have tagged for use to settle the first debts should go to eliminating the most debt, the most at risk to sue, or a combination of both if possible. This first bit of funds is not enough to settle the Home Depot account, so that is off the table. Care Credit will settle for 40% of balance and under when negotiating with outside collection agencies, or Gen Pac, or even someone who buys the account. You can see the 2013 settlement percentage trends with the largest credit card issuers, like Citibank and Capital One, here: https://consumerrecoverynetwork.com/review-top-7-credit-card-lenders-best-offering-debt-relief/
Those trends have not changed as we head into 2014, and while I expect some changes this summer, you should be through with all of this in the next couple months once you get your tax refund.
I would target Care credit and Citibank for your first settlements. Citibank already offered what is close to as low as they go on a debt this size based on current trends, and you can get Allied to settle for 50% or even a bit lower. Remember, smaller balance accounts are tougher to get the best reductions when settling.
Settle the other debts with your tax refund.
Capital One is the most likely to sue out of your list of credit cards. But they are also the hardest to settle with directly. If you wait until you get your tax refund, hopefully that comes in the next 2 months, you will still likely be able to negotiate with the first outside agency Capital One sends your accounts to for collection. Your targets will be 50% to 60% of the balances owed at the time you are negotiating.
Settling the Home Depot account will similarly be done with the first collection agency to get the account, unless it is bundled and sold right outside of charge off. But even then, you can often settle for the same target of between 40 and 50% (sometimes a bit less, but best to be realistic).
Yes, you definitely want to get everything in writing when settling. It is no different with original creditors than with debt collectors and debt buyers. The documentation is pretty standard in either case. You can review this report for more about what to look for in settlement letters, and also read through the first several comments to learn more about how getting the deal documented with originators can be a little bit different.
A few questions for you:
- Are any other unsecured creditors being paid on time? If so, who and are the balances less than a few hundred dollars?
- Are any of these accounts joint with your husband? Which ones? Are any just in his name?
- Do you have a bank account with Citi or Capital One?
I can offer some additional feedback and raise more awareness if I know the answer to these questions. You can post them in the comment section below, along with any additional questions or concerns my feedback brought up so far.
Anyone trying to plan around using their tax refund to settle unpaid bills is welcome to post in the comments for feedback.
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
This website is awesome! Thanks for so much information and helpful advice!
I am considering using my tax return ($3000) combined with a personal (interest free!) loan of $1000 from my mother, and my ability to set aside $200 per month or possibly more if we sell off our personal items garage sale style and also just scrimp and save to settle out as much of my debt as we can. My fiance might be getting a disability back settlement in about 4 months, or if they deny him again he has a motorcycle worth about 3 or 4 grand that he really loves but he would be willing to sell if he has to. Also I actually work in third party collections as well, so i am hoping the next few months will be an ideal time to also boost that minimum number by hitting my bonus goals but I dont want to count that chicken until it is hatched so that is why I am saying 200 as a minimum but optimistic about possibly doing more 🙂
I have begun to cease my payments to all of my accounts except a citibank dividend card (the highest banance account with the lowest interest rate) as of february 1st because I just cant afford all of the minimum payments right now and it is what it is. so, before the accts start acruing late fees and interest the total is about 20 thousand and it is split as follows:
$169.31 on a Home Depot store card now 1 mo past due $261.12 on a Kohls store card not yet past due, $291.16 on a Citi Dividend visanot yet past due, $1,142.19 on a BJ’s visa not yet past due, $3,103.28 on an Old Navy visa not yet past due, $2,083.25 on a Chase visa not yet past due, $1,044.55 on a Capital One visa not yet past due, $3,113.37 on a Target visa not yet past due, $2,121.51 on a Walmart discover card not yet past due, and $7,330.80 on a Citi simplicity whichI did pay the minimum payment for, 8 days late this month.
Anyways, I am not sure if it is better to use my tax return and the loan from my mother to pay off the highest interest rate cards (citi dividend, kohls, home depot, and old navy visa) and then use my 200 a month of base income available along with the other potential windfall funds to pay off my accounts in full and avoid collections, or if I might be better off letting the accounts go a few months past due and then attempting to settle them out for less.
I am not sure I want to use credit cards again once I am done dealing with this, but if at all possible I would like to keep a decent credit score so that in a couple years or so, when I will probably need a new car loan I will be able to get a decent rate…. I also already own a house but I might want to move in a few years as well.
Oh! One more question! is it a bad idea to keep paying just the citi dividend card while letting all the other ones go past due, or is it better to try to keep that card because it is my lowest interest rate and highest balance?
Alicia – I saw this comment after posting the previous reply. If negotiating settlements is the path you choose, keeping current on the Citi dividend card could impair your strategy and savings with the other accounts. In fact, Capital One and Discover may refuse to settle. That would mean settling with collections in later stages. Here is more on negotiating with Discover, and more about settling with Capital One.
Alicia – Given the details you provided (and thanks for being so thorough), you are a really good candidate to settle your accounts, or apply an aggressive debt roll up strategy. I would encourage you to read more about debt roll up here, and relate that article and payoff example, then reread the following feedback.
Settling unsecured debts like your credit cards is not ideal for smaller balance accounts. Each month you miss a payment there will be fees. Let’s assume that will be $30. Settling is best done right before charge off, and charge off for most credit card debt tends to occur at 180 days of nonpayment. That is potentially 5 months of 30 dollar fees, so $150 added to your current balance. That inflated balance is what you would be negotiating from when settling. Now consider that negotiations on smaller balance accounts is often not done for the best savings, you could end up paying a settlement several months from now that is equal to, or even higher, than the balances are today, and getting all the extra credit report negatives in the process. I recommend paying off all of your small balance accounts, not settling them. You can read more about concerns related to keeping accounts open while settling here. And more about which accounts are best to settle here.
If you continue to pay your larger Citibank card (which is how I read your comment), you run the risk of the other creditors (CapOne, Target, Discover)taking exception to the fact that minimum payments are current with Citi and not them. Not that they will not settle with you, but they can and do raise objections to other accounts being current. This can lead to settlements that are just not as favorable. Your targets with those creditors when settling should range close to those I talk about here in a average situation. But you could end up settling for higher rates with some of your creditors due to the other card getting paid monthly.
I like the debt roll up strategy I linked to above more for your situation, than settling in order to save only a couple grand on those other accounts. What are your thoughts after reviewing more?
Hi Michael!
Thanks so much for your helpful response 🙂
To answer your questions:
1. Our mortgage, 2 car payments, & student loans are all being paid on time. Other than that, we don’t have any other unsecured debt.
2. No, all the credit cards are all in my name. My husband has a credit card in his name only…(oops forgot to mention that one–sorry) It has a $475 balance on that one & is behind by 2 payments. it is Care One credit card.
3. No, we don’t have a bank account with Citi or Capital One. We do our banking thru our local credit union.
I meant to ask to, when we settle, do we send in the money via money order? or can we do an external deposit thru our bank? I wasn’t sure….
Thanks Lis. This should be a pretty straight forward process for you.
When you are ready to pay your settlements, I recommend doing so from a bank account you set up expressly for that purpose. You could deposit your tax refund, and any other money you have to supplement that, into a new checking account you set up at the same bank you have your accounts now. Here is a brief report about paying the settlements you negotiate.
Feel free to post any and all developments, additional questions and concerns, to this page. A solid chronology will be really helpful for other readers.
I read Liz’s original post and was amazed at the similarities in our situations. Our account balances are higher (total ~$40K), we have more creditors (15 with the highest balance being just under $16K), and most accounts are in both my husband’s and my name. We have just learned we are getting a substantial (to us) tax refund and would like to settle the debts we have. We, like Liz, are current on our mortgage, two car payments, and a personal loan (through our credit union). I would love to hear any updates Liz has to this point or any advice for us. Thanks!
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