I have a friend who is a recovering addict. He is finally getting back on his feet, but now that he's no longer flying underbthe radar, collection agencies are starting to pop up to collect on old debts that were ignored during his years of addiction.
His current financial status: approximately 12k in savings, intended to pay his living expenses while he gets a new business off the ground. He is not making money yet in his new business, but I expect it will pay his living expenses within three months. Meanwhile he has an irregular but good paying gig that should cover his expenses so long as it continues.
My questions have to do with Addressing his debt. I have no personal experience with unpaid debts myself, being super responsible, but he has asked for my help.
He has already negotiated an old credit card bill which he paid off for about 50%. His current credit report shows that paid and just another $250 bill outstanding. However there are several credit inquiries in the past year which might be collectoon agencies still to xome.
Also he has an ancient student loan which he is now getting a collection letter on. This loan is from thirty years ago. For a while the irs witheld his income tax refunds to apply to this loan. But after a few years of that he fell out of the regular economy.
He doesn't know the original loan amount, it was for a welding school he never did attend. The letter says the principal is $2800, interest $7000, and $2400 fees.
I've done some reading and it looks like you should be able to settle a loan like this for the principal plus half the interest. I'm guessing the $2400 fees is collection agency bs.
So....he could save several thousand if he could negotiate that deal. And he would still have a smaller but ok emergency fund. But we're not sure what other old bills may still crop up. And we don't know for sure if those previously witheld IRS refunds have been properly applied.
Alternatively, he could just start a payment plan, and keep a bigger emergency fund. That could be safer if other old debts are going to surface. But then he loses the ability to settle for a reduced amount and save possibly$5k in the process.
How would you handle this?