Last Thursday I ran a post that discussed the grim state of the credit card business. In it I discussed a New York Times article about consumers settling their credit card debt for less than what was owed. I even passed along some simple negotiating tips.
One thing I (and the Times) failed to mention is that if you settle your $3000 credit card debt for $2000, the $1000 that was written off by the credit card company is often considered taxable income. You will get a 1099 on it and come next April 15 you will either have to pay taxes on it or file a special form to explain why you don’t have to pay taxes on it. (This is discussed in detail in a great post at Don’t Mess With Taxes inspired by the same Times article.)
That it may be taxable doesn’t quite seem fair, does it? You’re broke, you manage to convince the card company to be "reasonable" and then Uncle Sam wants a cut. Actually, it’s not completely nuts. You really are up $1000. You got $3000 of stuff (and interest payments) for $2000. And the $1000 reduces the card company’s taxable income, so it seems mildly reasonable it might increase yours.
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On Monday the New York Times ran a piece that, in a better world, would not have been news. Turns out that credit card companies are often willing to settle delinquent accounts for less than what is owed. Golly.
The article did contain an important tip for those in serious credit card trouble. When the card issuer calls you out of the blue and offers to let you 
settle the whole thing for 80 cents on the dollar, you should, without hesitation or reflection, say no. Then hang up. They’re not calling because they think you’ll pay them eventually. That 80% is what we Wall Street types call a “first offer”.
The Times piece tells the story of a guy who got a call like this, said no thanks, and then when the company called back a few weeks later, offered them 50%.
It’s a deal, the account representative immediately said, not even bothering to check with a supervisor.
Where I come from, the account rep would be considered very rude. Proper etiquette would have been to put the customer on hold for thirty seconds while pretending to beg a supervisor to okay the deal. At the very least, the rep could have heaved a big sigh and mentioned something about how will probably be fired for this.
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One of the things I have learned writing this blog is that I have no power to predict which topics and posts are going to be popular. Sometimes I write what I think is an insightful and even controversial post and it gets five ho-hum comments and 
no links. Then I write what I think is a forgettable few paragraphs on a unimportant topic and next thing I know there are 30 impassioned comments and links to it all over the web.
My post last week on LifeLock’s legal woes fell into the surprisingly popular category. I thought it was a modestly interesting wrinkle on a rather unexciting topic. I didn’t understand what a hot button identity theft is for some, and what a great business it is for others.
Controversy and money is a combination I can’t stay away from, so I decided I needed to learn more about identity theft. It hasn’t been going that well. It seems the more I read the more confused the picture gets and even answers to some basic questions become more murky and ambiguous the more I dig.
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You have seen the ads for a company called LifeLock. They’re the ones with the CEO’s Social Security number. It must be a very effective campaign. The company currently has 1.5 million subscribers at $10 a month each.
And what do you get for your $120 a year? Well, a few things, but the major one is that LifeLock will place a "fraud alert" on your credit reports. These warn potential grantors of credit that something is fishy and tell them to contact you directly to confirm that it was really you that asked for the loan. Fraud alerts expire after 90 days, so LifeLock dutifully renews them for you four times a year.
That’s a nice little business they’ve got. $180 Million in recurring annual revenue for not a lot of work. But before you slap your forehead and ask why you didn’t think of it first, you should know that it looks like the party’s over.
LifeLock’s use of fraud alerts is pretty clearly abusive. They were created by federal law as a way for consumers to place a red flag on their credit reports if they were currently involved in fraud, not as a precautionary step to be taken by millions. (The LifeLock website says that to use the service you must "confirm that you have a good faith suspicion that you have been or are about to become a victim of identity theft." Wink wink.)
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I’ve always wanted to invent my own derivative. I realize some of you may think that’s strange, but for a finance geek like me, it’s only natural. And I think I’ve come up with a good one.
It’s for people without appropriately large emergency funds to live off if they lose their job or otherwise fall into financial distress. I call it the Expensive Loan Option, or ELO. The way it works is that you pay me a fee of $X per year and I guarantee that you will be able to get a loan at any time during that year for $5X at 20% interest. So, for example, if you want to be sure of being able to borrow $10,000 at 20% interest at any time during the next year, just pay me $2000 and you can sleep soundly.
Excited? Well, of course you are. Perhaps you have a nice job and enough liquid assets to pay four months of expenses should something nasty happen. That’s okay, but the Fabulous Suze Orman has told you that you need eight months worth of liquid assets. No problem! Just buy an ELO from me. If it costs you $3500 a month to support that glam lifestyle of yours, then just sign up for a $14,000 ELO for the modest fee of only $2800. I take PayPal.
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One thing I (and the Times) failed to mention is that if you settle your $3000 credit card debt for $2000, the $1000 that was written off by the credit card company is often considered taxable income. You will get a 1099 on it and come next April 15 you will either have to pay taxes on it or file a special form to explain why you don’t have to pay taxes on it. (This is discussed in detail in a great post at Don’t Mess With Taxes inspired by the same Times article.)
Credit Cards, Housing, Taxes | Frank Curmudgeon | 
June 22, 2009 9:00 am | 
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