topic Use liquidity to pay credit debt & get on IRS payment plan? in General Credit Topics

Use liquidity to pay credit debt & get on IRS payment plan?

Anonymous — Tue, 08 Feb 2011 17:46:25 GMT

Hi all,

I've worked hard for a long time to repair my credit score after frivolous college-years spending, and am now credit debt free and have a FICO score of 805. Needless to say, I want to keep it there or improve it. It's with that in mind that I ask the following:

A family member of mine has substantial credit debt on a single card w/ a reasonable, but still relatively high APR ~ 11%. Let's say it's $20k. I on the other hand as a self-employed consultant have $20k in cash in a savings account that I'd planned to use to pay my 2010 federal income taxes (I don't make quarterly estimated payments because I like having the liquidity in case of an emergency...and the penalties are minimal).

I am considering using this $20k to pay off my family member's credit debt, and then working out a payment plan with the IRS to pay off my 2010 taxes over the next (probably) couple of years. My family member will take on these payments instead of having the monthly credit card payments. The idea here is a simple one - we can get a MUCH lower interest rate with Uncle Sam than we can with any credit card company and they're also far more flexible about repayment timeframes. At the same time, by paying off the credit debt my family member should see a substantial improvement in her FICO score.

The question I have is, am I putting myself at any kind of credit-related risk by doing this? I don't believe that the IRS reports tax debt if you work it out with them in a timely fashion and stick to making your payments, but I am not certain. It's obviously very important to me (and my family) that I maintain my current credit rating for all of the obvious reasons!

For the sake of discussion, consider my family member's ability to make the planned IRS payments, and to repay the entire debt, a no-risk "given".

Thanks much in advance!

Re: Use liquidity to pay credit debt & get on IRS payment plan?

MarineVietVet — Tue, 08 Feb 2011 19:20:01 GMT

Hello and welcome to myFICO.

This is just my opinion and take it for what it's worth. I would not do what you are thinking of doing. It's all well and good and admirable to help a familiy member but your immediate family and their well being comes first.

Yes the IRS does accept payment plans but you can't look into the future and predict what might happen down the road. There are never any guarantees about your health or income. If you have the money for your taxes that must come first.

And with all due respect IMO (In my opinion) there is no such thing as a no-risk "given" as far as your family member (or anyone else) paying this off. You don't know what their financial future will be like either.

Like I said this is just my 2 cents. I wish you well in whatever you decide to do.

From a BK years ago to:
EX - 9/09 pulled by lender 802, EQ - 10/10-813, TU - 10/10-774

"Some people spend an entire lifetime wondering if they've made a difference. The Marines don't have that problem".

Re: Use liquidity to pay credit debt & get on IRS payment plan?

mew — Tue, 08 Feb 2011 20:38:33 GMT

I also think that you should ask yourself, "If something were to prevent the family member from making those future IRS payments (health issues, loss of employment, any other possibility, etc) would you be willing to "forgive" the debt and have no problem with it? Should something go wrong...how will you absorb the costs? Should something go wrong...do you want to become a CCC trying to collect on a debt?

Since you obviously care about this person, I think you not only have to consider the risks for yourself, but also for the family member. Depending on how this family member ended up with 20K worth of CC debt, you might pay it off for them and they run it back up and are then faced with your tax bill and more CC debt. If things don't go right, it could be devastating for the family member to feel like they let you down too. Make sure they are ready for such a lifestyle adjustment.

Maybe you could provide better support by teaching this family member all the things that you learned by working so hard on your credit. If their credit score isn't that bad, maybe there are less expensive (lower interest rate) options out there that you could help them research. Maybe the family member wouldn't mind giving a thorough review to their budget and cutting costs to put toward the debt, getting a second job, etc. Of course we don't have any details about the family member so I am just throwing ideas out there (if they are 86 these probably are the best options).

Anyhoo, I agree that your willingness to consider such a big gesture is admirable...best of luck to you and the family member.

Re: Use liquidity to pay credit debt & get on IRS payment plan?

Anonymous — Wed, 09 Feb 2011 23:47:21 GMT

As a new forum member here, and with all due respect, neither of these responses address the question I'm asking. This is a credit-related forum - I'm not posting here looking for advice on family matters. I'm looking for knowledge regarding potential risks, if any, to my credit should I take on a Federal payment plan for my taxes. That's it. The third person in my story isn't within the scope of the question being asked. That's why I said, for the sake of this discussion, consider their ability to make the Federal payment plan payments a given.

No offense intended, just would like to refocus the thread should anyone else care to contribute.

Cheers

Re: Use liquidity to pay credit debt & get on IRS payment plan?

MarineVietVet — Thu, 10 Feb 2011 00:01:41 GMT

@Anonymous wrote:
As a new forum member here, and with all due respect, neither of these responses address the question I'm asking. This is a credit-related forum - I'm not posting here looking for advice on family matters. I'm looking for knowledge regarding potential risks, if any, to my credit should I take on a Federal payment plan for my taxes. That's it. The third person in my story isn't within the scope of the question being asked. That's why I said, for the sake of this discussion, consider their ability to make the Federal payment plan payments a given.

No offense intended, just would like to refocus the thread should anyone else care to contribute.

Cheers

I will try and clarify what I was trying to say. If you carry through with your plan and something unforseen happens, i.e your financial situation changes and you are unable to pay your obligations on this then your credit will likely be harmed for many years.

And yes the third party factor does matter because no one can say this person will be able to pay the entire amount and that also would affect your credit profile. Both of these concerns are credit related.

So I stand by my initial observations and advice.

Re: Use liquidity to pay credit debt & get on IRS payment plan?

Anonymous — Thu, 10 Feb 2011 00:16:25 GMT

Thanks for the reply.

Hmm. It seems I'm still managing to confuse things with "details". Let me rephrase my entire question, strip it down:

If I don't pay my taxes in time, but do work out a payment plan w/ the government on time, stick to making my payments, and repay the entire debt as scheduled - will my credit score be adversely affected?

Thanks again

Re: Use liquidity to pay credit debt & get on IRS payment plan?

Lel — Thu, 10 Feb 2011 18:08:46 GMT

@Anonymous wrote:
Hi all,

I've worked hard for a long time to repair my credit score after frivolous college-years spending, and am now credit debt free and have a FICO score of 805. Needless to say, I want to keep it there or improve it. It's with that in mind that I ask the following:

A family member of mine has substantial credit debt on a single card w/ a reasonable, but still relatively high APR ~ 11%. Let's say it's $20k. I on the other hand as a self-employed consultant have $20k in cash in a savings account that I'd planned to use to pay my 2010 federal income taxes (I don't make quarterly estimated payments because I like having the liquidity in case of an emergency...and the penalties are minimal).

I am considering using this $20k to pay off my family member's credit debt, and then working out a payment plan with the IRS to pay off my 2010 taxes over the next (probably) couple of years. My family member will take on these payments instead of having the monthly credit card payments. The idea here is a simple one - we can get a MUCH lower interest rate with Uncle Sam than we can with any credit card company and they're also far more flexible about repayment timeframes. At the same time, by paying off the credit debt my family member should see a substantial improvement in her FICO score.

The question I have is, am I putting myself at any kind of credit-related risk by doing this? I don't believe that the IRS reports tax debt if you work it out with them in a timely fashion and stick to making your payments, but I am not certain. It's obviously very important to me (and my family) that I maintain my current credit rating for all of the obvious reasons!

For the sake of discussion, consider my family member's ability to make the planned IRS payments, and to repay the entire debt, a no-risk "given".

Thanks much in advance!

The short answer to your question is yes. But it's unpredictable. Even if you enter into a payment agreement with IRS, they may still file a federal tax lien which would appear on your credit reports. It doesn't happen with every person who does this, and it's not clear whether there is a specific dollar threshold above which a lien will be automatically filed. Some people have suggested that a higher tax bill increases the likelihood of a tax lien, and I would assume that $20,000 would be considered a fairly hefty amount.

The lien can filed even if you are on time with every payment.

Though the effect of the lien on your credit score is also unpredictable, its presence on your credit reports would likely have negative effects on your ability to secure new credit.

Re: Use liquidity to pay credit debt & get on IRS payment plan?

Anonymous — Thu, 10 Feb 2011 18:15:47 GMT

Lel - thanks so much for your concise answer, this is exactly the type of knowlegeable information I was looking for. The risk in this case isn't worth it I don't think, so will look into other options.

"The short answer to your question is yes. But it's unpredictable."

Isn't it always when dealing with Uncle Sam?

Cheers

Re: Use liquidity to pay credit debt & get on IRS payment plan?

OnTheRebound — Fri, 11 Feb 2011 03:33:58 GMT

I was on a payment plan once for about $10K. The IRS filed a lien very quickly. If I recall correctly, it was after making 3 or 4 payments. I was shocked and my credit took a nose dive for years to come.

If you have the money, my suggestion to you would be, for what it's worth, pay your UNCLE first, before anyone. It will save you a great deal of misery, not to mention penalties and interest.

However, if you are intent on helping this person, I think your interests would be better served by taking out a loan from a bank, not the IRS. I think you will sleep better.

Re: Use liquidity to pay credit debt & get on IRS payment plan?

Anonymous — Fri, 11 Feb 2011 03:42:30 GMT

I wouldn’t take such a huge risk, no matter how close that family member is to me.

Re: Use liquidity to pay credit debt & get on IRS payment plan?

BungalowMo — Fri, 11 Feb 2011 19:17:56 GMT

@Anonymous wrote:
Hi all,

I've worked hard for a long time to repair my credit score after frivolous college-years spending, and am now credit debt free and have a FICO score of 805. Needless to say, I want to keep it there or improve it. It's with that in mind that I ask the following:

A family member of mine has substantial credit debt on a single card w/ a reasonable, but still relatively high APR ~ 11%. Let's say it's $20k. I on the other hand as a self-employed consultant have $20k in cash in a savings account that I'd planned to use to pay my 2010 federal income taxes (I don't make quarterly estimated payments because I like having the liquidity in case of an emergency...and the penalties are minimal).

I am considering using this $20k to pay off my family member's credit debt, and then working out a payment plan with the IRS to pay off my 2010 taxes over the next (probably) couple of years. My family member will take on these payments instead of having the monthly credit card payments. The idea here is a simple one - we can get a MUCH lower interest rate with Uncle Sam than we can with any credit card company and they're also far more flexible about repayment timeframes. At the same time, by paying off the credit debt my family member should see a substantial improvement in her FICO score.

The question I have is, am I putting myself at any kind of credit-related risk by doing this? I don't believe that the IRS reports tax debt if you work it out with them in a timely fashion and stick to making your payments, but I am not certain. It's obviously very important to me (and my family) that I maintain my current credit rating for all of the obvious reasons!

For the sake of discussion, consider my family member's ability to make the planned IRS payments, and to repay the entire debt, a no-risk "given".

Thanks much in advance!

*I didn't read all the replies...just gave my personal opinion.

Ohhhh, as much as I totally love & trust my family members, I would be very leery of this arrangement. I wouldn't want to depend on anyone else to pay my debt to Uncle Sam.

Maybe you can simply get a personal loan from your bank & toss about 12k toward their acct. TAKE the card from them & they can make the 2 payments each mo. Their payments will be much lower & your loan will be at a great rate, so I'd bet that these 2 together would be less than what they are paying now.

This way you would still have your cash to pay taxes & likely have some left over too.