By: Jeena Cho

Q: I’ve had my hours reduced at work and no longer working overtime. To make ends meet, I’ve been using my credit cards. I have about $30,000 in credit card debt, paying very high interest rate (hovering around 30%). I have five cards. My parents offered to loan me $15,000 from their savings. Can you help me settle my debt? I don’t want to file for bankruptcy.

I get questions like this all the time. Clients wanting to borrow money from family and friends to pay off or settle credit card debts. Usually, the question is prefaced by “I read on Google…” or “My friend told me…” I cringe every time someone says this because I’ve met too many clients who has tried this strategy, failed and comes in to file for bankruptcy anyway. Now, in addition to listing Chase, Discover, American Express, etc. on his or her bankruptcy petition, the client has to add the family member or friend on the petition too.

To make matters worse, if you’ve repaid your family or friend before filing the bankruptcy, he or she may be considered an “insider.” This means that the Trustee in your case can potentially demand the money back from your family or friend! That sure makes for an uncomfortable conversation at the dinner table.

The reason why debt settlements generally don’t work is because it’s difficult (if not impossible) to get all of your credit cards to play ball. You might be able to settle 4 cards, but what if the last card holds out? Or decides to sue you instead? How about taxes? Do you have enough money set aside for taxes on the forgiveness of debt? (That’s right. Whatever the credit cards forgive, will be attributed as income to you.) Don’t make the mistake of throwing your family or friend’s good money after your bad credit card debt.

Debt settlement can work in some cases where the client has 1 or 2 creditors and has lump sum cash to settle. For more information on debt settlement, read our Guide to Living Debt-Free/ Bankruptcy and Other Alternatives.

Have you tried debt settlement? Did it work out for you? Please share your story.

Image Credit: futurowoman

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