A Return to the Days of Lay-a-way!

by Sherri Mahoney-Battles

During the holiday season I was surprised to hear stores like Sears and K-Mart promoting their lay-a-way service. I have a two-fold fascination with this new marketing tactic the first being purely nostalgic.

As a young girl my mother would take me shopping for fall clothes at Sears Department Store, and the clothes would be put on lay-a-way. We would go back every other week or so, and my mother would pay $20 towards her lay-a-way. Christmas gifts, birthday gifts, and lots of other purchases all went on lay-a-way at Sears and K-Mart.

I can clearly remember the excitement when my mother would make that last payment, and a clerk would go into the back room and return carrying large boxes of purchases that had been put on lay-a-way months earlier.

Over twenty years ago I read The Road Less Traveled by M. Scott Peck. I particularly remember a passage about delayed gratification. I knew then that I was the type of person that would always save the frosting on the cupcake for last.

Over the years I have worked with dozens of clients weighed down with thousands upon thousands dollars of credit card debt. Lured by huge marketing campaigns geared towards promoting a buy now pay later attitude many of my clients bought into this approach only to find themselves buried under the mountain of debt this attitude results in.

In the last few years I have seen an increasing number of clients with 1099-C forms as part of their tax preparation. These are forms that credit card companies issue when they agree to compromise or reduce a credit card debt due to an individual’s inability to fully pay their debt.

In cases of hardship and an inability to make payments a credit card company may agree to cancel a portion of the debt owed in exchange for a lump sum payment to settle the debt.

Be wary of firms offering to negotiate credit card debt on your behalf. Many of them will ask you to stop paying your credit cards and make the payments to them instead. Also, the fees these firms charge are typically quite high.

There are non-profit firms that can help people negotiating with credit card companies, but it’s also something that an individual can do on their own.

Typically, you need to be able to demonstrate some form of hardship such as an illness, death, or loss of employment. You also need to be unable to make payments. So if you have been making consistent monthly payments, the credit card companies will be less likely to want to make a deal.

The fact that more and more people have been forced to pursue this option in recent years means that some credit card companies are inundated with people looking to negotiate deals. Credit card debt, however, is not secure debt so there are no assets to seize in settlement of the debt.

It is also one of the easiest debts to discharge in bankruptcy, and an individual that files for bankruptcy will often eliminate credit card debt completely. As a result, most credit card companies know that it’s better to settle for a reduced payment than to receive no payment if the individual should file for bankruptcy.

Unfortunately, when a credit card company agrees to cancel a credit card debt the amount of the debt cancelled is typically taxable. Often, taxpayers that negotiate these settlements are not aware of the tax implications.

Additionally, when a credit card company agrees to cancel a portion of your debt it appears on your credit report as a default in payment. This is not something to be taken lightly since a default on your credit report will have an adverse affect on your ability to obtain financing in future years.

There are lenders and credit card companies that will provide credit to people with less than perfect credit scores, but they charge significantly higher than normal fees and interest rates.

Both bankruptcy and cancellation of debt should only be considered when all other avenues of repayment have been exhausted.

When I discuss these options, especially bankruptcy, with clients I typically refer to it as a “One Time Get out of Jail Free Card”.

Bankruptcy is an effective tool for someone in dire straits who is committed to making serious changes to their financial lifestyle. All too often, I have seen the same clients get themselves into credit card debt over and over again.

If you find yourself temporarily unable to make payments on your account, an easier option with less impact is to contact your credit card company and request that they put your account into forbearance. Forbearance will waive or reduce your payments until your financial situation improves, but the account will continue to be charged interest.

Approximately ten years ago I was doing presentations to students at local high schools about the pitfalls of credit card debt. Many of them were headed for colleges where credit card companies would have tables set up at orientation encouraging them to sign up for their first credit card.

Ironically, a few years later, I was reading articles about the alarming number of graduating college students that were filing bankruptcy due to astonishing high credit card debt.

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A few months ago my 23-year-old daughter applied for and was denied a credit card. Kudos to the credit department that had the foresight to realize that a college student employed only part-time might not be the best credit risk.

For many years the credit card companies took the position that everyone should have credit cards. They calculated their risks and knew that high interest rates they charged would more than cover the number of people that filed for bankruptcy or settled their debt for a lesser amount.

Times have changed and most credit card companies have tightened their criteria. Could this possibly mean a return to a time when people actually save their money and wait until they can afford something before purchasing it; a return to a period of delayed gratification?

Stores like Sears and K-Mart have seen the change coming, and they know that people do not have the same credit card buying power that they did not that many years ago. Programs like lay-a-way and Christmas Clubs may become popular once again.

Personally, I welcome the return to a lay-a-way lifestyle. When I do my Christmas shopping I plan to put it all on lay-a-way.

Sherri Mahoney-Battles, of Taxing Matters, specializes in income tax preparation for small businesses and individuals.

As an Enrolled Agent, licensed by the IRS, Sherri has been representing clients for over twenty-five years in cases of audit, collections, and appeals and does extensive work with non-filers.

Visit her website at www.taxingmatters.com, email Sherilyn@taxingmatters.com or call her at 508-636-9829.