Debt Collector law suit

[kmattin]

The Law Firm representing me for my BK7, filed suit for harassing me after they were notified of my being represented by my law firm. There was a settlement, and it appears the check will be sent to me. I still owe some money to the law firm, they allowed a payment plan. From the paperwork sent to me to sign, does the IRS consider this income? How will the Trustee view this? I have sent an email to my law firm asking these questions, but considering this is the holiday season, have yet to get back to me. Any ideas? Thanks for your help.

[justbroke]

Was this harassment after you filed and/or after the discharge your Chapter 7? If so, then it is probably not part of the bankruptcy because the harassment didn't occur until after the bankruptcy was filed. Your attorney would know more, but I don't see how post-bankruptcy issues with a creditor make any settlement/recovery part of the bankruptcy estate. So, how would the Trustee see it? Well if it's post-bankruptcy and was not an action that occurred pre-filing, the Trustee wouldn't be involved. But if it's related to something that happened before filing in a Chapter 7, it could be property of the bankruptcy estate. (The answer is different for a Chapter 13 because they work differently.)

As for your tax-ability question, it's better to ask a seasoned tax professional. Generally, a settlement would be taxable because the IRS taxes "all income" regardless of source. Then there are the exceptions. If you have such an exception/exemption from taxing a settlement, then your bankruptcy attorney would let you know. But generally speaking the only settlements that are non-taxable are usually related to an injury (think settlement of an automobile accident where you are hurt). I don't even know if the creditor would send a 1099-MISC if the settlement was of an insignificant value, or at all.

[kmattin]

Thanks for your answer. The lawsuit came pre-filing. The debt collector was notified that I was represented, they continued anyway.

[justbroke]

Your bankruptcy attorney will need to deal properly with this. Since the issue arose pre-filing, that lawsuit should have been listed in the bankruptcy paperwork (Statement of Financial Affairs). I can say much more about it than that. Because you are represented by an attorney, the attorney will need to check that it was disclosed and deal with whether or not to contact the Chapter 7 Trustee. It is possible that the trustee knew about it, but "abandoned" pursuing the suit. In any case, your attorney is the only one that can answer this question.

[kmattin]

I am on a payment plan, so I have not filed yet. The attorney did notify all my creditors. This one continued anyway. The creditor and my attorney reached a settlement. It is my hope that the money to be sent by the creditor will be used to pay my attorney fees for filing against the creditor, the rest to pay towards my payment plan. I really do not wish to receive any of that settlement. The IRS, of course, wants their cut as well.