Debthelper: After Divorce, Pay Down Debt

    WIth real estate prices getting lower and lower, this could be a great time to buy a home. But the first step in fiscal responsibility is knowing when you shouldn't make a big purchase, instead paying down your debt. After a divorce, paying down debt is essential, particularly if you have credit cards.  

MSN.com's Money Central has a column called “Women in Red,” where women handle their financial situations together with support. So I am going to help provide inspiration for you to take care of your own debt, as I take care of mine. And along the way, I'll offer tips and suggestions to help. Today's article will focus on settling your debt for less than what is owed.

Like most Americans, I have a fair amount of debt. As I have said, I wasn’t always a credit counselor. Divorce, unemployment, illness and many other factors can cause debt to be an unfortunate byproduct of life. As a credit counselor I have learned, it doesn’t have to be that way though. When you are going through the toughest times, some bills do need to be put off. There comes a time when you are sitting in the calm after the storm, and it is time to take care of old responsibilities For me, now is that time. 

It may be the time for you as well, or maybe you are not there yet. If you aren’t, don’t despair, there may be other solutions in the meantime. The first step is to know what your estimated monthly expenses are and to come up with a goal; whether it be to save for a car, a vacation, your children’s college fund, or even a house. The best way to know what you are actually spending is to look at your bank statements. 

Then see if there are areas that can be improved, work on improving your spending in order to achieve your goals. What do you need to do to achieve your goals? If your goal is buying a house or car you may need to pay off debt first. What is the best way to pay off debt? There are several options depending on your situation.  

For months, a broken lease due to job relocation was nagging in my mind. It was a massive amount of money, and I felt a sense of dread and obligation. I knew I couldn’t do anything about it, so I pushed it to the back of my mind. Then the day came when I said, I am financially stable enough to deal with this, and I want it gone. I went down to the leasing office, first I requested a copy of the old lease, (hoping for a clause that states you can get out of it, if your job relocates) a receipt for all the rent that was paid, and a statement of what was owed. Luckily, the leasing manager had taken mercy on my situation and had not sent the debt to collections even though it had been three months. 

The debt was bigger than I thought, and because I had three months to think about it; I had a plan. I burst out and said, “If I give you ‘x amount of dollars’ today will you settle for that amount? I have the money right now.” The manager said she would see if she was allowed to accept a settlement and said she would call back the next business day. I thought for sure it would not be approved, but the next day I received a call from the manager saying it would be accepted.

The apartment complex drafted a letter and (I kept several for my records) gladly paid the agreed upon amount. It felt as if a huge weight was lifted off my shoulders, and I was one step closer to my goal. Settlements can be a great way to pay off old debts or to negotiate debts with smaller companies who have the power to authorize mutually beneficial settlements. (For example the situation above.) 

The biggest disadvantage of doing a settlement is that you need a lump sum. Depending on how large the bill is, it may be difficult to save up for a settlement. Another disadvantage to a settlement is in most cases, (credit cards, loans, cell phone bills) is that your account must be already sent to collections. 

Once an account is sent to collections it reflects negatively on your credit. A settlement will also reflect on your credit, “Settled in Full for less than the amount owed,” rather than paid in full. It is still less detrimental to your credit than having an unpaid charge off. Another disadvantage to settlements is that if you are forgiven more than $600, you will have to claim it as income on your taxes. If you choose to do a settlement, always get the settlement offer in writing before you pay, and retain a copy for your records for five years. If a settlement is not the best option for you, or you just don’t have the money available to arrange a settlement; debt management plans can offer an alternative. 

The advantage of a debt management plan or DMP, is that your debts get paid off in full. The disadvantage is that most creditors do not offer concessions (interest rate reductions or fee waivers) for collection accounts. By joining a DMP, you will be moving toward your goals, faster rather than letting the account sit dormant nagging in the back of your mind. You can feel like although your financial situation is strained right now, that you are accomplishing something. If you are interested in finding out more about DMP’s, contact your local Non-Profit Credit counseling agency, or feel free to contact me.


Jennifer Lane is a certified credit counselor and is taking questions I can answer in upcoming articles. Please feel free to e-mail your questions to me at jlane@debthelper.com.