A reader brought my attention to a press release sent out by HomeStree Bank in Hawaii and the nonprofit credit counseling group American Financial Solutions. One thing is clear after I read the release is either those two companies don’t understand how debt settlement works at all or the person that wrote the press release is not all that informed.
The press release says:
Dean KiloDavis, Loan Officer for HomeStreet Bank, says having a settlement on a credit report can result in being turned down for a loan. “A settlement doesn’t instill confidence that you will repay your debt,” says KiloDavis. – Source
I wonder how the average banker would view the same consumer who was enrolled in a credit counseling program. Isn’t it all just really determined by credit scores these days. It is really. So it’s not the fact someone was in a debt settlement program that is the impact. It’s the impact on the credit score from the collections activity and maybe the charge off.
HomeStreet Bank must be one of the unusual lenders these days that makes its lending decisions arbitrarily based on what the credit report says rather than the credit score.
He explains it this way, “Imagine I ask you for a loan to be paid back in two weeks. Then you find out from a mutual friend they loaned me money. You are informed that I didn’t pay them back when I said I would, and I paid back less than I borrowed. Would this knowledge make you comfortable giving me the loan in the amount I asked for?”
So how is that different than the credit counseling approach where people get their accounts closed by the creditor and interest rates reduced. Wouldn’t the lender also be likely to say “Well they said they’d pay the interest we sold them but then they went and paid less.”
The press release says:
In addition to the damage to a credit report and the ability to borrow money, any type of debt forgiveness or settlement (except bankruptcy) may also result in higher taxable income. The Internal Revenue Service considers all or most settled debt or cancelled debt as taxable income, depending on the consumer’s asset-to-liability ratio (do they owe more than their assets are worth) at the time the debt was forgiven or settled. The individual will receive a 1099-C tax form from the creditor if $600 or more is forgiven. Also, while rare, creditors may sell the unpaid portion of the debt to a collection agency. The bottom line is that people may still be responsible for repaying part of the forgiven debt.
What HomeStreet Bank and American Financial Solutions fail to mention in their explanation is the IRS has a form and process to deal with this. IRS Form 982 eliminates the tax liability for all insolvent debtors and the tax liability up to the point where the consumer would become solvent.
I wish the issues with the release ended there, but they don’t.
The companies then recommend that consumers negotiate with the creditors directly to settle their debts and that the creditor, “Request that the creditor provide them with a 1099 – C form rather than sending the remaining debt to a collection agency.” Ironically they also don’t recommend that consumers should not deal with American Financial Solutions or other credit counseling groups and contact creditors directly to workout debt management plans.
Consumers do not need to pay huge sums of money to someone to settle their debts. There are debt coaches out there like ZipDebt and Consumer Recovery Network that will educate and coach consumers through the process and on how to make sure the debt is not sold to another party.
In closing the spokesperson for HomeStreet Bank seems to contradict himself.
“The information on your credit report determines your ability to qualify for many things from car insurance, getting a job, and of course buying or refinancing a home,” cautions KiloDavis, “but there are resources out there, like American Financial Solutions, who can get you back on track. Bad credit is not a death sentence. You can fix it, but it’ll take some elbow work. Making that first call to ask for help can be scary, but when some of that weight starts lifting off your shoulders, you’ll be glad you did it.”
So is he saying American Financial Solutions can repair or improve your credit? If so them American Financial Solutions would seem to run into potential trouble with the Credit Repair Organizations Act as other credit counseling groups have.
If not, then he seems to be saying that any impact you take from debt settlement is easy to fix.
The press release even says, “Credit counseling agency American Financial Solutions provides the information needed to make the right decision about settling debt.” I wonder if that means their approach is that there is not an appropriate time and place for debt settlement? Which there is of course.
Is American Financial Solutions providing consumers with a fair and balanced approach to all major debt solutions in order to allow the consumer to make an informed decision?
They also say, “But there are real ramifications to your credit and credit score when using debt settlements to manage debt.” But don’t seem to say that a credit counseling program that closes your accounts with the creditors can impact your credit score as well.
So what was the goal they were trying to achieve with this press release? You’ll find the entire press release here.
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