Five myths about Social Security

Five myths about Social Security - Everyone knows there are financial difficulties with the Social Security system, but misinformation and falsehoods are obscuring the problem and what needs to be done.

If you want to know the truth about Social Security, don't ask a politician or a pundit.

There's just too much misinformation floating around about the retirement system, and it's coming from both sides of the political spectrum. Some on the left claim that everything is just dandy and no major changes need to be made, which is hogwash. Some on the right claim the system is irreparable, which is hooey as well.

Stranded in between are the confused millions who contribute to and benefit from the system. They just want to know if Social Security will be there for them when they need it.

The answer is yes, if the politicians can ever get their acts together.

Here are five big myths about the system that are getting in the way of getting things done:

Myth No. 1: Social Security won't exist when I retire.

Those who want to dismantle Social Security often suggest it's about to collapse into rubble. That false assessment is one of the reasons so many people are convinced the system won't be there when they need it.

It's true that Social Security's finances need fixing. Without changes, the system will be able to pay only 75% of promised benefits after 2037.

But the system doesn't need radical changes to restore its financing to solid ground. The bipartisan Debt Reduction Task Force, headed by former Republican Sen. Pete Domenici of New Mexico and Democrat Alice Rivlin, a former director of the Congressional Budget Office, suggested several repairs:

• Gradually increase the full retirement age to reflect improvements in longevity.
• Change to a different measure of inflation that grows more slowly to calculate cost-of-living increases.
• Slightly reduce the growth in benefits for the top 25% of wage earners.
• Boost the amount of earnings subject to the payroll tax over time.
• Bring newly hired state and local government workers into the system.

These aren't the only changes that could be made. An immediate 1.8% payroll tax hike or a 12% overall benefit cut would also work (.pdf file). But a combination of smaller benefit cuts and tax increases may be the most reasonable, not to mention politically palatable, way of restoring the system to a strong financial footing. You can try coming up with your own solutions at the American Academy of Actuaries' Social Security Game site.

Myth No. 2: The trust fund assets are worthless.

Yes, Virginia, the Social Security trust fund actually exists. But it doesn't contain a big pile of cash.

The Old-Age and Survivors Insurance and the Disability Insurance trust funds collect our payroll taxes and invest the surplus, when there is one.

Over the years, the surplus has been lent to the federal government to pay for other programs. In return, the trust fund received IOUs in the form of special-issue, interest-paying Treasury bonds. These bonds are backed by the full faith and credit of the U.S. government, just as regular Treasurys are.

The trust fund has worked this way since its inception in 1939, by the way. Congress didn't place the fund "off limits" at one point and then later decide to raid it, despite hoax email assertions to the contrary.

The tricky part, and the reason some have dismissed the trust fund as an accounting fiction, is that the Treasury needs to come up with the money to make good the bonds when it's time to cash them in. This cash has to come from somewhere: increased taxes, reductions in other spending or additional borrowing. Although the trust fund assets aren't scheduled to be depleted for another 26 years, this need for the Treasury to redeem the bonds will put pressures on the federal budget well before 2037, according to the Social Security Administration's board of trustees.

Myth No. 3: Congress doesn't pay into Social Security, so it doesn't care about fixing the crisis.

U.S. lawmakers used to be exempt from the Social Security system. But that changed in 1984, when all federal employees, including members of Congress, were added to the Social Security system.

This myth is often accompanied by another fiction: that members of Congress participate in a lavish, exclusive pension scheme that guarantees 100% of their salaries for life, even if they serve only one term.

The truth isn't quite so juicy. Congressional lawmakers contribute to, and benefit from, pension programs that cover all federal workers. Before 1984, Congress and other federal employees were covered by the Civil Service Retirement System. Workers and lawmakers hired since then are covered by the Federal Employees Retirement System.

The pensions under either system depend on the federal worker's pay and how long he or she worked for the government. By law, the pension can't exceed 80% of the employee's pay in his or her last year on the job. Benefits paid under the system are reduced by the amount of Social Security a participant receives.

The rest of us would love to have a pension that pays 80% of our final pay, but the reality is that few federal workers, including lawmakers, will get that much. They simply won't participate in the system long enough. The average monthly benefit payment for federal workers is a bit more than $2,200, according to the U.S. Office of Personnel Management.

The reason Congress hasn't fixed the Social Security crisis is not indifference. It's politics. The most likely solutions all face strong opposition. If Social Security is going to get repaired, your lawmakers need to hear from you that you want it done, even if it means some difficult or unpopular changes.

Myth No. 4: Illegal immigrants are draining the system.

The U.S. has a serious illegal-immigration problem. More than 11 million people -- about 4% of the total U.S. population -- are living here without authorization.
This undocumented population has a heavy impact on schools and the health care system, among other things. But its effect on Social Security is actually positive. Illegal immigrants contribute billions of dollars a year, according to Social Security's chief actuary, Stephen Goss. Over the past few decades, the net positive contribution totals somewhere between $120 billion and $240 billion.

In other words, Social Security would be in worse shape than it already is without illegal immigration.

Undocumented workers pay taxes into the system under stolen Social Security numbers but rarely try to collect benefits, since they're not legally entitled to them. Some apply illegally, of course, and Goss estimates that such fraud costs the system about $1 billion a year, far less than what other illegal immigrants pay in.

To put the fraud into perspective: The Social Security system sends out $59 billion in checks every month, or more than $700 billion a year.

What's really causing Social Security's financial crunch is simple demographics: fewer workers supporting more retirees and other beneficiaries.

By the way, there's another, much larger group that doesn't benefit from its contributions to the system. This group includes married working women who make less than their husbands.

Married people can claim benefits based on their own work histories, or they can opt to get essentially half of their spouse's benefit. (You have to choose; you can't claim both at the same time.) So if your spouse's benefit is $1,000 a month, you would get a spousal check of $500.

That smaller spousal check is still greater than what many working women would qualify for, based on just their own work histories. And this spousal benefit is the same whether or not they worked. So these women get no benefit from all the payroll taxes they've contributed to the Social Security system.

Men can face the same situation if they're married to high earners. But typically it's women who are affected, since they usually earn less and have work histories that are often interrupted (as they stay home to care for kids or aging parents, for example).

Myth No. 5: I could earn better investment returns on my own.

Perhaps you could, but Social Security isn't an investment program. It's insurance, designed to insulate you against poverty in your old age.

Social Security is meant to provide you with a steady check in retirement that you can't outlive or lose in a stock market downturn. Many people wind up needing that income: Social Security provides the majority of income for more than half of people aged 65 or over. It makes up 90% or more of income for 43% of singles and 22% of married couples.

If you want an investment program that allows you to take your chances -- well, you've got that. You can (and should) invest through workplace plans like 401k's or on your own through individual retirement accounts and taxable accounts.

But all the evidence so far suggests that most people do a truly bad job of managing their retirement funds. They start too late, save too little and cash out when they leave jobs. They borrow against their savings or tap it for other expenses. They take too little or too much risk, hiding their money in cash accounts or overdosing on company stock, for example. They fail to rebalance their asset allocation. Some panic and sell in downturns rather than hanging on.

You may well be the exception. Even if you are, you may still be glad to have Social Security -- rather than yourself -- supporting parents and other relatives who didn't do as good a job providing for their last years. And if it turns out you're not the investing genius you think you are, you'll still have Social Security to fall back on. ( msn.com )

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Five myths about credit card debt

They're yuppie food stamps. They give new meaning to the question "paper or plastic?" And they're in everyone's wallet. Americans have nearly 700 million all-purpose bank credit cards, plus nearly 500 million retail store cards -- and they have transformed how we live and consume.

Today, Americans are more dependent on credit than savings, a radical departure from the last major economic crisis, in the 1930s. Congress's effort to change that, the Credit Card Accountability, Responsibility and Disclosure (CARD) Act signed by President Obama last spring, will go into effect in a few weeks. But it won't fix everything. Or maybe not much of anything. Here are the myths that muddle our understanding of how we've racked up so much credit card debt.

Middle-class American families have long depended on bank credit cards to manage their budgets.

1. Not true. Consumer credit originated with local merchants that offered "open book" credit to cement customer loyalty and increase sales. As major retail chains and malls replaced small shopkeepers in the 1950s and '60s, stores such as Sears and Montgomery Ward issued credit cards for the same reasons. But if you didn't like what Sears had to offer, you couldn't use its credit card anywhere else.

Universal or bank cards such as Visa or MasterCard were reserved for high- and upper-middle-income households. They were offered to reward the banks' best customers (after all, how many toasters could they use?) and served as loss leaders, as most cardholders paid off their monthly balances. Until the early 1980s, bank credit cards were a symbol of high social status, used mainly for convenience rather than because of need. This was the inspiration for the color-coded cards that emerged in the 1980s and 1990s: Fiscally responsible "convenience" users wanted to be distinguished from less credit-worthy consumers with a platinum card.

More people have credit cards because companies got better at managing risk and began marketing to lower-income customers.

2. Mostly no. Credit card use expanded dramatically during the golden age of the industry -- beginning in the early 1980s -- because deregulation suddenly allowed high interest rates and penalty fees, and credit cards became a major engine of bank profits. In 1978, a Supreme Court decision effectively ended consumer interest-rate limits and the federal usury law. After the 1981-82 recession, industrial restructuring shifted demand for bank loans from manufacturing companies to individual households, and national banks aggressively pushed for more deregulatory policies, in line with the '78 decision. A 1996 Supreme Court ruling that ended state-regulated limits on credit card fees furthered that cause. Today, only nonprofit credit unions, as mandated by Congress, must abide by an interest rate ceiling of 15 percent.

As more and more people were preapproved for credit cards in the '80s and '90s, the "free" credit used by the most affluent households was subsidized by the high interest rates and penalty fees paid by the most financially distressed. A carefully guarded secret of the industry is that about a quarter of cardholders have accounted for almost two-thirds of interest and penalty-fee revenues. Nearly half of all credit card accounts do not generate finance and fee revenues.

Responsible cardholders will have to pay more to make up for the defaults of irresponsible consumers.

3. False. Although credit card companies are experiencing record default rates, irresponsible consumer borrowing is not the main culprit behind soaring interest rates and fees. Banks have suffered far more from mortgage foreclosures and home-equity loan defaults. Major banks encouraged their credit card divisions to relax their standards at the end of the financial bubble; more customers went deeper into credit card debt. Those customers were encouraged to refinance their mortgages, generating high fees for the banks. Banks then sold securities backed by credit card debt to institutional investors around the world. When the bubble burst in September 2008, banks could not sell these low-quality securities. They were stuck with poorly performing credit card portfolios.

For cardholders, the central problem is that the credit card industry's business model is fundamentally flawed; bankers want consumers to foot the bill for its reengineering through higher interest rates and fees. As deregulation gave rise to conglomerate financial institutions, credit cards continued to serve as marketing loss leaders for attracting higher-income cardholders (who typically paid off their monthly charges) by bundling them with other financial products such as loans, brokerage fees and insurance. With the recession, these other bank revenues have declined sharply, raising pressure on credit card companies to boost profits.

The credit card industry is so competitive that regulation is unnecessary.

4. Rather than a self-regulating and intensely competitive market of more than 5,000 issuers, the credit card industry is one of the most concentrated in the nation (and is increasingly being hit with allegations of monopoly practices). The top three issuers -- Bank of America, Citibank and Chase -- control more than 60 percent of outstanding credit card debt. Consumer choice has declined over the past 20 years as economies of scale for marketing, administration and customer service have led thousands of card issuers to cash out to the largest banks. And self-regulation has failed when it comes to weeding out the worst card issuers; Visa and MasterCard have dismal track records in disciplining their members.

The CARD Act finally protects consumers against the credit card industry's most abusive practices.

5. Yes and no. Although touted by the Obama administration as a major consumer achievement, the long-awaited CARD Act, which goes into effect Feb. 22, offers a mix of overdue protections and surprising omissions.

Some of the worst industry practices are prohibited, including billing systems that generate finance charges on paid-off balances, some retroactive interest-rate increases and unrestricted marketing to consumers under the age of 21 who don't have an independent source of income.

On the negative side, Congress stipulated a nine-month phase-in period for these regulations. For millions of Americans, especially those suffering from employment and income interruptions, this is too late. If you're in debt today, this bill doesn't help you. Companies already have jacked up interest rates, sharply reduced lines of credit, increased service fees and diluted the value of loyalty reward programs. These trends have brought consumer credit scores down, triggering higher borrowing costs and greater difficulty finding work.

But there is a silver lining to falling credit scores and fewer preapprovals for cards: More people are learning that when it comes to plastic, you can leave home without it. ( washingtonpost.com )

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Smoking Keeps Its Grip on Urban Poor

Smoking Keeps Its Grip on Urban Poor. Misconceptions, marketing are boosting rates to double the national average, researchers say . A full 42 percent of people in Milwaukee's poorest neighborhoods smoke -- more than twice the national U.S. average -- sacrificing $9 on a pack of cigarettes even while most of the households reported earning less than $15,000 a year.

Even more troubling is the fact that a large number of these low-income smokers hold beliefs that make them less likely to quit, according to ongoing research from the University of Wisconsin-Madison.

Over the past 40 years or so, the overall smoking rate in the United States has decreased to about 20 percent, but those gains have taken place largely among people with resources, namely money and education, said Bruce Christiansen, an associate scientist with the University of Wisconsin Center for Tobacco Research and Intervention in Madison, who is one of the researchers on what's known as the "ZIP Code" project.

"With public health, we got 80 percent of the people who were going to quit smoking to quit smoking. That's great, but the next 20 percent is going to be tough," added Dr. Jay Brooks, chairman of hematology/oncology at Ochsner Health System in New Orleans. "Smoking tends to be a disease of poverty and lack of education. Thirty years ago, 50 percent of the population smoked and now we're down to roughly 25 percent. What we have left is a very select group of people."

That select group includes people with mental health issues, which, according to the U.S. Substance Abuse and Mental Health Service Administration (SAMHSA), smoke 44 percent of all cigarettes.

Not only are these groups often specifically targeted by Big Tobacco, they also tend to reside in areas without extensive health care systems and don't have insurance, Christiansen said.

This study, a partnership between the University of Wisconsin School of Medicine and Public Health and the Salvation Army, sent five interviewers door-to-door in two of Milwaukee's poorest ZIP codes.

Interviews were conducted primarily between 9 a.m. and 4 p.m. on weekdays, catching the "poorest of the poor," those who don't work. Many in the group would be hard to capture in a regular survey as they often don't have phones, Christiansen said.

Responses from 654 smokers living in low-income neighborhoods revealed the following:

* People who smoked thought most other people smoked as well and, when asked, said that 73 percent of adults smoked, way higher than the 20 percent who actually do.
* Almost two-thirds thought it was okay to smoke as long as it didn't impinge on others.
* Almost half thought that medications intended to help people quit smoking were actually more dangerous and addictive than cigarettes.
* More than half (56 percent) had never heard of the free Wisconsin Tobacco Quit Line despite efforts to promote the service. In fact, Christiansen noted, some respondents said that going to jail was the best way to quit (at least temporarily).
* Thirty-eight percent had never actually tried to dispense of the habit. "It was amazing how many people said they hadn't tried to quit," Christiansen said. "They thought that everyone is doing it so it's okay."

Christiansen and his colleagues haven't finished analyzing the results yet but want to take the research a step further. "Can we change beliefs and, if we can change them, does that increase uptake of [quit-smoking] treatment?" he wondered. "Then we'll look at what it takes to change beliefs."

Christiansen's group has started an initiative called "Tobacco-Free Advocates," which trains individuals in the community to bring short (10-minute) messages to local groups.

"They talk about willpower, that it's a muscle you can build, dealing with urges, that medications can give willpower a chance to work," he said. "They're very brief messages. Then we made the advocates available to them."

And when the researchers come across households without any smokers, they offer them a bright green sign to place in the window that says: "Another smoke-free home in this community." [ healthday.com ]

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Helping Your Child Buy Their First Home

Helping Your Child Buy Their First Home. With real estate prices bottoming out in many areas and a juicy tax credit still on the table, now may be a great time for your child or grandchild to buy a first home.

But these days, mortgage lenders may demand substantial down payments and they often charge high fees and unattractive interest rates to those with less-than-stellar credit. Wouldn’t it be great if you could loan your child or grandchild enough money to make the purchase?

Obviously, this idea isn’t for everyone. But if you can afford to lend a hand, the Feds will help, too, with a tax credit worth up to $8,000 for deals done by Nov. 30, 2009. With that deadline in mind, here’s what you need to know.

The Soon-to-Expire Home Buyer Credit

The Stimulus Act extended the first-time home buyer credit to cover qualified purchases that close by Nov. 30, 2009. The credit equals the lesser of:

* 10% of the purchase price,

* $8,000, or

* $4,000 for a buyer who uses married filing separate status.

Your child can use the credit to offset his or her federal income tax bill, including any alternative minimum tax (AMT). Since the credit is refundable, they can collect in cash any remaining credit after their federal income tax bill has been reduced to zero.

Of course, there are some ground rules:

• The credit is only available if your child has not owned a principal residence in the U.S. during the three-year period that ends on the purchase date. The home must be your child’s new principal residence. If your child is married, both spouses must pass the three-year test.
• The credit is phased out if your child’s 2009 modified adjusted gross income (MAGI) is too high. (MAGI is the number at the bottom of the first page of your child’s 2009 Form 1040, increased by certain tax-free income from outside the U.S.)

The phase-out range for unmarried individuals and married individuals who file separately is between MAGI of $75,000 and $95,000. The phase-out range for married joint filers is between $150,000 and $170,000.

Giving Your Child a Loan

The current low-interest-rate environment makes the idea of loaning money to your child or grandchild to help with a first-time home purchase look good.

But be careful: With a loan to a family member, I recommend charging an interest rate equal to the IRS-approved applicable federal rate (AFRs). Why? Because the AFR is the lowest interest rate you can charge without causing any unwanted tax complications for yourself under the dreaded below-market loan rules. I won’t go into the details of how these rules work. The important thing to understand is they should be avoided.

For a term loan (one with specified installment repayment dates or a balloon repayment date), the relevant AFR is the one for a loan of that duration for the month the loan is made. Right now, AFRs are at historically low levels, so making a loan that charges the AFR is a great way to give your child a very favorable interest rate with no tax worries.

For example, say you make a $50,000 term loan in September to help your daughter buy her first home, which will also qualify for the lucrative $8,000 tax credit. You wisely follow my advice and charge an annual interest rate equal to the AFR. For a loan with a term of 3 years or less, the current AFR is 0.84% (assuming monthly compounding of interest). The AFR for a loan term of more than three years but not over nine years is 2.83%. The AFR for a loan term of more than nine years is 4.29%. You can continue to charge an interest rate equal to the AFR (whichever one applies to your loan) over the entire loan term, regardless of how interest rates fluctuate during that time.

Remember: AFRs can change every month, and they will go up if general interest rates go up. You can find the AFRs for the month you make a loan at IRS.gov. Use the search engine, and enter applicable federal rates.

Bottom line: As long you make the loan while interest rates are still low and charge the AFR, your child will get a good deal, and you won’t have any tax issues beyond having to report the interest income on your Form 1040. But don’t wait too long! [ smartmoney.com ]

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Don't Ignore That Debt Collector

Don't Ignore That Debt Collector. The rules of engagement with debt collectors have changed dramatically in recent months, and even people who pay their bills on time need to understand what's happening.

In fact, a good chunk of the complaints pouring into the Federal Trade Commission lately come from consumers who don't owe the debts for which they're being pursued.

Unfortunately, being innocent won't protect you from harassing phone calls, dunning letters or credit score damage.

And if you do owe money, you can expect even-more-aggressive collection efforts as the economy deteriorates and consumer delinquencies spike.
Here's why:

• A huge and growing market in old debt. I've tracked the explosive growth of this controversial part of the collection industry in previous columns. Collection agencies buy and sell debts that are typically years old and which may be poorly documented. Since collectors often don't have enough information to find the right debtors, they cast a wide net and sometimes wind up hounding the wrong people.

• The damaged economy. Living in bad times means more people with bad debts. This means collection agencies have more business but a tougher time getting borrowers to pay up, which can lead to more-aggressive tactics. Newly hired collection agents, added as agencies bulk up, may not understand the nuances of the laws governing fair debt-collection practices, and the industry has long had a problem with rogue collectors who do know the law but flout it.

• The rise of collection law firms. In the past, people often were given the advice not to talk to debt collectors -- to simply hang up when they called. The idea was that anything you said could be used against you, so it was better to say nothing.

These days, however, people who refuse to talk to collectors may be more likely to get sued.

"More creditors are working with collection law firms," as opposed to regular collection agencies, said credit expert Gerri Detweiler, author of several books on savings and debt. "If you don't respond, you could run the risk of triggering a lawsuit."

While collection agencies can hassle you and report your bad debts to credit bureaus, they have to hire a law firm to actually sue you and garnishee your paychecks. Collection law firms can skip the middleman, making them much quicker to sue.

Exactly what you should say depends on the situation you're facing.

1. When you don't owe the money.

If you're sure a collector has the wrong person, you can write the agency a so-called cease-communications letter saying you're not the debtor and demanding the agency stop contacting you.

Under the federal Fair Debt Collection Practices Act (.pdf file), that's supposed to stop the calls, and the collection agency isn't allowed to contact you again unless it's to advise you that it plans to take some specific action, such as filing a lawsuit -- which is unlikely if it's really not your debt.

There are two caveats here:

• To send a cease-communications letter, you have to know who is calling. By law, the collection agency is required to send you a letter within five days of its first contact with you. In addition to including its own contact information, the agency letter is also required to tell you how much you supposedly owe, the name of the creditor and what to do if you don't think you owe the debt.

Some unethical collection agencies ignore this law. They call over and over without leaving more than a call-back number, if that.

If you talk to one of these collectors, you may be able to get the identifying information you need if you play along -- to a point.

"You might be able to get them to give you the name and address of the company under the guise of: 'I have to look into this and ask my spouse about this debt,'" Detweiler said.

If that doesn't work, an Internet search on the number that shows up on your caller ID, or the call-back number, if any, may yield results.

• It may be your debt after all. The debt may be the result of a dispute and you may well feel it's unfair, but that doesn't mean the collection agency has the wrong person.

Don't try to pretend you don't know anything about a debt if you do. Instead, see whether you can settle the problem with the original creditor or negotiate with the collector to settle the debt in exchange for removing it from your credit report. You can always sue the original creditor in small-claims court, but allowing an unresolved debt to trash your credit is foolish.

2. When it's your debt, but it's outside the statute of limitations.

Every state limits how much time a creditor has to sue borrowers over a debt. The limits vary by state and type of debt, as I explained in "Is there a statute of limitations on debt?"

If the limit has expired on your debt, a collection agency may still file a lawsuit, but to beat the case you would just have to show up in court and point out that the debt is too old.

In many cases, though, you can stop further collection attempts by sending a cease-communications letter that points out the statute of limitations on the debt has expired and that you don't want to be contacted about the debt again.

You may have to repeat this exercise every time the debt is resold to a new collector, however. Also, you want to be dead-sure you're correct about the statute, Detweiler said. Consider consulting with a consumer-law or bankruptcy attorney.

If you want to permanently end collection attempts, you should consider offering the collector a settlement if you can. See Situation No. 4, below.

3. When it's your debt, but you can't pay it.

Here's where you need to tread carefully, Detweiler said. You don't want to provoke the collector into filing a lawsuit against you, which could result in the garnishment of your wages or the seizure of your bank accounts or other assets.

That doesn't just mean not hiding from collection calls; it also means not making promises you can't keep.

"Do try to stay in touch," Detweiler said. "But don't say too much. Something like, 'I can't pay right now; I've lost my job. I'll touch base with you in a month.'"

If the collector presses you, which is likely, just keep responding: "I can't pay right now. There's nothing else I can do."

Don't let yourself be cajoled into making even small payments if it means neglecting more-crucial bills, such as rent, utilities or the payment on the car you use to get to work. For more details, read "How not to pay your bills."

Also, don't raid retirement funds, which are protected by law from creditors, or home equity, which is also often sheltered. If you're tempted to resort to these measures, or your best attempts to avoid being sued fail, talk to a bankruptcy attorney about your options. A bankruptcy filing can stop collection efforts and help you reduce or erase your debts.

"A lot of people wait too long to consult a bankruptcy attorney," Detweiler said. "They wait until after they've made an expensive mistake."

The only time you shouldn't be worried much about lawsuits is if you're "judgment-proof." That status varies somewhat by state, but generally it means that your only source of income is Social Security or disability payments, which are untouchable by most creditors, and that you don't have any assets that can be taken. Again, it's smart to consult an attorney to make sure you know where you stand (bankruptcy attorneys often offer free initial consultation).

4. When it's your debt, and you can pay at least some of it.

If a bill has gone to collections, paying it won't do much good, if any, for your credit scores, as I explained in "When paying bills can hurt your credit."

And many times you'll be dealing with a collection agency that bought your debt from the original creditor for pennies on the dollar. You can always try to get the account returned to the creditor, but often the company that originally extended you credit won't accept any payments and will refer you back to the collection agency.

You should also know that your original debt may have been inflated by interest, fees or the sheer whim of an unethical collector.

You may still decide to pay off your old debts in full and arrange payment plans with the collection agencies. What may be smarter, though, is to make lump-sum settlement offers.

"A collector may well take 35% (of what it says you owe) just to get it in a lump sum and be done with it," Detweiler said.

There's no magic formula for what you should offer, although the older the debt, the less the collector may be willing to accept. "Start lower than what you can pay and negotiate," Detweiler recommended.

Also, make sure you get a letter from the collection agency that it will accept your payment as full restitution for the debt and that it will not resell any unpaid portion. Another point to negotiate, if you can, is the removal of the collection account from your credit reports. You should get these promises in advance and in writing before sending the money.

5. When a collector has gone over the line.

Negotiating or even talking reasonably with a collector can be impossible if the person is shrieking obscenities at you, threatening you with arrest, telling your friends and neighbors about your debt or harassing you with repeated phone calls.

All of those actions are violations of the federal debt-collection laws and signal that you're dealing with an unethical collection agent who can't be trusted to keep his or her word.

You may have better results asking to speak to a supervisor. If the collector just hangs up, only to restart the harassment later, you'll probably want to consult a consumer-law attorney about your options, which may include suing the collector who's breaking the law. [ msn.com ]

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