Dear Dr. Don,

I have a 525 credit score and am currently going through a debt management company. What do you know about these types of companies?

Also, I have eight delinquent accounts on my credit report. Would it be better to pull a debt consolidation loan and pay the accounts off? Or would going through a debt management company be a smarter choice? Which one will help me to boost my credit score? And will it affect my credit score if I can get the creditors to accept settlements for less than owed?

– James Jericho

Dear James,

Before signing with a firm, you need to read the FTC’s Facts for Consumers publication “Fiscal Fitness: Choosing a Credit Counselor” as well as Bankrate’s FAQ about debt and credit counseling.

Most consumers considering a debt consolidation loan are looking to do it through either a cash-out refinancing on their first mortgage, or a home equity line of credit or home equity loan. It’s fairly hard to find an unsecured debt consolidation loan with terms that make things easier for the indebted consumer.

A debt management plan shouldn’t hurt your credit score, but it may impact your ability to access new credit. The Bankrate feature “Debt management plans affect your credit” explains all this in greater detail.

In contrast, I’ve never heard of a debt settlement plan that didn’t first trash a client’s credit. That approach helps get creditors to accept pennies on the dollar as a settlement. The debt settlement firm representing the client may or may not be able to get the creditor to indicate on the client’s credit report that the debt was paid as agreed. That’s the goal, but there’s no guarantee.

Bankruptcy can be the best choice for getting out from under unsecured debts. It’ll impact your credit score for seven to 10 years, depending on whether you file a Chapter 13 bankruptcy (seven years) or a Chapter 7 bankruptcy. If the choice is between debt settlement and bankruptcy, I’d lean toward bankruptcy. If the choice is between a debt management plan, or DMP, and bankruptcy, the DMP is likely to be the better choice.

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Dear Tax Talk,

In 2008 I had large losses from real estate that I was able to carry back to 2003 and recover taxes paid. According to my accountant, it was a change in the law that year that allowed a longer carryback for small businesses. In 2009, I had losses again and I want to take the loss to 2007 which is the last year that I paid big taxes. Is that OK or do I have to go back to earlier years like I did in 2008?

– Russ

Dear Russ,

A carryback of a tax loss allows taxpayers to immediately recover tax paid in earlier years when they sustain a business or casualty loss. Previously limited to a two-year recovery of past taxes, 2009 tax law changes expanded that to five years. Imagine if you could eliminate all the taxes you paid in the last five years. It would certainly help alleviate your large losses and may get you back in business.

Although it was the intent of Congress to help taxpayers recover as much prior taxes as possible, they created a confusing set of rules when they made the changes that allowed taxpayers to elect up to a five-year carryback. Without an election, taxpayers are limited to a two-year carryback period. The original law change expanding the carryback period applied to eligible small businesses for 2008 only. This change happened soon after President Barack Obama was elected, when The American Recovery and Reinvestment Act, or ARRA, was passed in February 2009.

In November 2009, The Worker, Homeownership and Business Assistance Act, or WHBAA, of 2009 was passed and allowed a five-year carryback to most taxpayers, even those that were not small businesses. This second law change applies for losses in 2008 and 2009, if the taxpayer elects. To qualify under the WHBAA, the taxpayer must have not received TARP funds. For example, General Motors would not qualify for a 2003 to 2006 tax refund.

Because you made your election under ARRA, the WHBAA rules would have no effect on your 2009 losses unless you elect to apply them. In determining which year is the best carryback year, you have to look to when you paid the highest taxes compared to your taxable income. If 2007 is the last year that you paid big taxes, then that is when you would want to carryback to. Since without the WHBAA election this is the year that you are eligible to carryback to, the election does not benefit you and you would not make the election. Other taxpayers interested in the longer carryback for 2008 and 2009 should see the IRS’s question and answer on the ARRA and WHBAA carryback elections.

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