Americans Deeper in Debt in 2010

Yes, the numbers lied.

According to new data from the Federal Reserve, Americans owed 9% less in credit card debt during the second quarter of 2010 than they did during the same period in 2009. The outstanding debt fell from $887.1 billion to $806.9 billion

But like so many statistics, the numbers don’t tell the true story.

The reason that it appears that consumers are carrying less credit card debt this year is that the banks have written it off as bad debt. Once accounts have gone 6 months without payment, the banks remove them from their balance sheets. Therefore, while consumers still owe the debt, it is no longer officially “owed” on their books.

In reality, consumer debt is increasing at a higher rate this year than last year.

It isn’t hard to understand why. With nearly 10% of Americans “officially” unemployed and probably another 10% who are unemployed but no longer receiving benefits, many consumers are going further in debt in an attempt to keep up with day to day expenses.

Unfortunately, many consumers in financial trouble have been taken in by debt-settlement companies. These companies promise debt relief, but often do nothing to help the consumer. In fact, they’ve made matters worse by taking up-front fees for services never performed.

Under a new FTC rule, debt settlement companies are prohibited from charging any fees until after they’ve produced results. But that rule doesn’t go into effect until October 27, so consumers are still at risk. And of course, a new regulation won’t prevent the criminal segment from attempting to prey on those who are most vulnerable.

If you find yourself unable to meet your minimum payments, shun the debt settlement companies and instead meet with a nonprofit credit counselor and a bankruptcy attorney. These professionals can help you see all the options available to you and will help you create a debt settlement plan, if you are able to make minimum payments.

Because banks are losing money on uncollected debt, they’ve become more agreeable to negotiating settlements. But beware. Consult with an attorney before agreeing to an offer, and don’t consider any offer unless it is in writing and clearly states the amount that the bank will accept as payment in full.

Consumers should be aware that when a bank forgives more than $600 in debt, they will issue a 1099 form, which shows the forgiven debt as income. This is reported to the IRS and the consumer will be expected to pay income tax on the amount. However, consulting a tax attorney before the agreement is made can result in having that tax waived.

Author: Mike Clover

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