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 Dear
Dr. Don,
Amazingly, my husband and I have just won $20,000 on a
scratch-off lottery card! I'm still in shock. My husband turned in the
card today and got a check for about $13,000 after taxes. Unfortunately,
we are about $27,000 in debt and after years of working hard to try to honestly
pay off these debts, we have not been able to keep up and have recently signed
on with a debt solutions company to help negotiate settlements with our creditors.
The prize money alone is not enough to pay off our
debts, so we think we should deposit this money into some sort of high-yield savings
account and wait for it to grow, while at the same time continue with the two-year
plan we have with the debt solution company. That
way, we figure we'll be able to get out of debt sooner. When we have enough in
the debt-solution savings account (between our negotiated monthly payment and
the extra lottery winnings) to pay the settlement, we'll finally be free of this
terrible burden. On the other hand, we are so afraid of mismanaging this
incredible windfall that we are over-thinking everything about it. Do you
have any advice for us? Thank you!
-- Anka Advice  Dear
Anka,
Congratulations on your lottery windfall, but how to invest
this money isn't your first priority. Getting out of the debt negotiation
plan is your first priority.
Debt negotiation sounds like a
reasonable way to get out from under a debt burden that you can no longer afford. Unfortunately,
the tactics generally used by debt negotiators to get your creditors to accept
partial payment trashes your credit history to the point where you'll have trouble
getting credit for years. Filing for bankruptcy is usually a better solution than
debt negotiation. The following is from the Federal Trade Commission's
Facts for Consumers publication, "Knee
Deep in Debt," about debt negotiation plans: There
also is no guarantee that a creditor will accept partial payment of a legitimate
debt. In fact, if you stop making payments on a credit card, late fees and interest
usually are added to the debt each month. If you exceed your credit limit, additional
fees and charges also can be added. This can cause your original debt to double
or triple. What's more, most debt negotiation companies charge consumers substantial
fees for their services, including a fee to establish the account with the debt
negotiator, a monthly service fee, and a final fee of a percentage of the money
you've supposedly saved. While creditors have no obligation
to agree to negotiate the amount a consumer owes, they have a legal obligation
to provide accurate information to the credit reporting agencies, including your
failure to make monthly payments. That can result in a negative entry on your
credit report. And in certain situations, creditors may have the right to sue
you to recover the money you owe. In some instances, when creditors win a lawsuit,
they have the right to garnish your wages or put a lien on your home. Finally,
the Internal Revenue Service may consider any amount of forgiven debt to be taxable
income. Take the time to read the whole publication
including the complete discussion on debt negotiation programs. My best advice
is for you to focus on getting out of this debt negotiation plan. If you
have difficulty canceling the plan, talk to your state attorney general and/or
hire an attorney. The National Association of Attorneys General (NAAG)
provides contact information for each state's Attorney General. From
there you should go back to square one in managing your debt burden. It's possible,
if some of these debts are old debts, that you no longer owe them because the
statute of limitations (SOL) has expired on the credit agreement. The Bankrate
feature, "State
statutes of limitations for old debts," explains this in greater depth.
Beyond that, you should consider credit counseling or bankruptcy as a solution
to your credit problems. The FTC guide, "Knee Deep
in Debt," referenced earlier in this column, has more information for you
on these topics. | 
