Debt settlement questions

To make a long story short, I've been looking for permanent full time work for over a year. A former client finally paid me but with a bad check. I warned my bank that I was leery of the check. After five days, I called the bank which informed me there was "no problem." So I mailed out my vendor checks.

Boom! Seventeen days later - 17 days - I got a form letter from the bank: the check bounced and they used my savings to make good all the checks I mailed out plus fees. (The asst. bank mgr. literally said to me, "It isn't our fault you listened to us." Swear to God, she said that!)

I was truly wiped out financially. Each month, for eight months, I have only been able to scrape by for rent, utilities, phone, car fuel and if anything is left over, food - in that order. Nothing in credit card payments because I literally didn't have it. (I told that to one collector calling. He actually said to me, "Gee, that is really unfortunate but I need you to send us $45 today.") I didn't have money for a medical problem either but no one seemed to care about that.

We finally caught the guy. He has agreed to pay a settled lump sum - 42% of what I am owed (yes, we know the money is good this time).

I am willing to make good to my credit card companies for 60% on the dollar which - if you take out all those ridiculous fees and high APRs - wouldn't be bad. (BTW, in the past when I tried to add pre-agreed-to late fees to my clients two small claims judges merely threw out the fees.)

So in the spirit of "everything is negotiable,” I want the card companies to remove all negative info on my accounts. I talked to two CRAs. They both basically said the same thing: "we merely report what is sent to us." So they don't care.

A while back there was a guy testifying before the Senate re: credit cards. He showed documents that he paid $22,000 on a $9,000 credit balance. I said then I'd kill myself before I'd do that.

I want my life back. I never had a mark on my credit for 39 years. Should I live the rest of my life based on eight months of problems?

After I pay off the credit cards at 60% on the dollar, all the bad credit info removed, and have the medical procedure finally done, I'll have about four or five months of rent/utilities/phone/ gas/food to live on while still looking for a full time job.

Your thoughts?

The second part would be ...

I've heard a rumor if the credit card companies settle with you like I want to, they then report the FULL amount to the IRS and you have to pay tax on the full amount.

A. Is that true? and
B. If it is true then what about the senior guy recently got BofA to "write down $400,000 on his mortgage and do a reverse mortgage for $80,000. Is he going to pay tax on the $400,000?

If no, then what's the difference and how do I avoid paying taxes on he "forgiven"/"adjusted"/"etc." money?

Thanks for reading. Look forward to hearing back.

Comments for Debt settlement questions

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Jan 25, 2010
debt negotiation questions
by: Mary

We asked Michael Bovee, a debt negotiation expert, to answer your questions. You can learn more about how debt negotiation works in our debt settlement podcast.

His answer:

I applaud your efforts in doing whatever it takes to persevere in these tough economic times.

Having your receivables and vendor payments sent into the tailspin you described cannot have been easy to manage. The good news is that you can now start the damage control.

From what you wrote, the payment you received (though less than the full amount) will allow you to put this behind you.

You indicated you are 8 months behind with your creditors. This means most, if not all of your accounts, are at some stage of charge off and will have been placed with outside collectors via purchase or assignment. You?re negotiation efforts will be primarily done with these outside companies.

Depending on who the original creditor is, who the debt was placed with and other variables, your estimate of 60% payment on all balances is likely too high for many of the accounts.

Your negotiation efforts will prove successful, I have no doubt. One area you will not succeed in the negotiations is your goal of them removing negatives on your credit report. Unfortunately, that damage is done and will remain for 7 years. You will however be able to start the credit rehabilitation process by negotiating and paying settlements which will then show a zero balance owing on the credit reports. This fact and the passage of time will get your credit back in shape.

You are aware of the tax implications of forgiven debt is over $600.00. There is no way around that if you are solvent at the time of settlement.

You can however avoid the tax on forgiven debt if you are technically insolvent at the time of the settlements.

Determining solvency is done by adding up all of your liabilities and all of your assets. If the debt and obligations amount to more than the value of your assets, you are insolvent. This exercise excludes any income from employment.

If you are solvent at the time of the settlements and therefore owe taxes on the amounts forgiven, it is what it is. This fact then becomes part of your overall strategy and how you will be budgeting your available funds. You simply cannot offer 60% across the board without budgeting for taxes owed on the 40% forgiven.

You should seek the advice of a tax professional for a solid understanding in this regard.

Settlement will definitely work in your situation. I would encourage you begin ASAP. Your accounts having now been charged off have increased the risks that one or more of the creditors refers the account to an attorney who will be authorized to file suit. A lawsuit may not derail your plans, but it will complicate them and the settlements on accounts that progress that far are typically done at a much higher percentage.

I wish you success.

Jan 25, 2010
Taxes on forgiven home loans
by: Gerri

I'll add that Congress passed a law - The Mortgage Forgiveness Debt Relief Act and Debt Cancellation - so that homeowners generally don't have to pay taxes on debt forgiven as long as it is for their primary residence.

The Taxpayer Advocate has recently made a similar recommendation for consumer debt that has been forgiven. Debt erased in bankruptcy is not taxable.

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