The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: Should I pay my relative’s debt?
A relative is way behind in paying off credit card debt. They owe about $20,000.00 across 18 credit cards and wants me to pay it all off, with a promise of paying me back over several years. Can you help settle with 18 credit card companies? Would this arrangement be made in writing, so there is no misunderstanding and there are no follow-up collection efforts? Would the interest each credit card company foregoes be considered as income to be reported on my relative’s tax return, with taxes to be paid?
Helping Relatives can be Risky
We commend you for helping your relative get out of debt. It’s often overwhelming and confusing to find ways to manage debt effectively, especially for the elderly. Paying off your relative’s debt and expecting he’ll repay you with interest is often a risky scenario for more reasons than one. With limited income, it will become increasingly difficult for them to pay you back, and if your relative continues to use the newly paid-off cards, they may struggle once again with unmanageable levels of debt.
Explore Other Debt Relief Options
The good news is that there are other options to manage their debts, including your debt settlement suggestion. A debt settlement is an agreement between the creditor and the borrower to pay a debt for less than it’s owed and consider the debt as satisfied. Credi tors are not required to offer this kind of deal, and it’s usually challenging to do so if the accounts are current, but it’s not impossible. If you were to negotiate with creditors on your relative’s behalf, make sure to get all the settlement agreements in writing before sending any payments.
At the NFCC, we connect you with certified financial counselors who can help your relative manage his debt through personalized plans and programs through counseling sessions, which are often free of charge. However, our affiliated counselors do not negotiate debt settlements on behalf of others. There are for-profit debt settlement companies that promote debt negotiation programs, but there are numerous consumer advisories that caution against falling into the wrong hands when hiring a company to settle your debt. Debt settlement companies often ask borrowers to stop credit card payments and send their payments to them. This puts borrowers in a risky position, you may be defaulting in your payments and sending your cash to someone else without any guarantees that a creditor will accept an agreement. So, you will be dealing with collectors and out of cash. And, just like you mentioned, debt settlements can have fiscal consequences. Any forgiven debt greater than $600 is considered as taxable income.
Talk to a NFCC Certified Financial Counselor for Safe Recommendations
I suggest that you and your relative talk to an NFCC Certified Financial Counselor before you make a decision. Even if you live hundreds of miles away, you can all schedule a call with a financial counselor and explore your relative’s options. The counselor will start by reviewing your relative’s income and overall situation to determine what options are best for him. His options can include self-repayment strategies, which you could help him set up and manage, or even a Debt Management Plan (DMP). If a DMP is the right debt repayment strategy for your relative, it will offer him an easy way to consolidate his monthly payments in just one, typically with a lower monthly payment. His accounts will all be credited and paid in full and he can benefit from reduced interest rates and waived fees. This program is also an agreement between the creditors and the borrower through a nonprofit managing the plan. Creditors have preexisting relationships with creditors which makes their cooperation more likely.
With your support and a counselor’s guidance, your relative can implement a debt repayment strategy that won’t require you to spend $20,000, hefty fees to implement, and that will help him deal with the situation effectively. He is very fortunate to count on someone like you—best of luck to both.