BK or Collection (Credit Cards)?

[SinkingFast]

Deal is not closed yet, but three cards have offered 20%: $8k vs. $42k. They have even offered to go down to 15% if I can pay sooner. I will let you know once I get the paperwork. Thanks.

If you are able to get this deal to go thru, be prepared to pay Uncle Sam extra tax $$$'s in the tax year you make the payment.

Your Creditors will likely issue you 1099's for the "forgiven" portions of your debts with them.

Based on what you've said above, you'd owe the IRS taxes on an additional $34K of "income".

[Spartan]

I recently got an offer to settle a judgement (cc). It is 4 yrs old. They want 40 cents on the dollar. I guess that is the initial opening negotiation. Too bad. Even if it is 10 cents on the dollar, I would still be better off filing and get all other taken care of at the same time.

[Quandary]

Received confirming letters last night. I have agreed with BofA to repay 15% of the total debt owed over a six month period. I will get 1099s, but I'll deal with those at the appropriate time. Does the 1099 actually treat the forgiven debt as income, dollar-for-dollar? Thanks.

[HHM]

Does the 1099 actually treat the forgiven debt as income, dollar-for-dollar?

Yes!

But to get out of paying the income tax, you will have to satisfy the IRS insolvency requirement.

[Quandary]

Since final payment is in '07, I assume that tax liability will be for that year?

[HHM]

Since final payment is in '07, I assume that tax liability will be for that year?

I would assume so since the debt will not have been "technically" forgiven until you live up to your end of the bargain.

[Quandary]

Has anyone had any luck negotiating with collection agencies as opposed to the actual creditor banks? Are they as willing to negotiate a settlement? Completely opposed? Any opinions or tales of experience would be greatly appreciated. Thanks.

[HHM]

Has anyone had any luck negotiating with collection agencies as opposed to the actual creditor banks? Are they as willing to negotiate a settlement? Completely opposed? Any opinions or tales of experience would be greatly appreciated. Thanks.

Actually, you can usually get better settlements from the collection agencies then you can from the original creditor.

[Quandary]

Interesting. But by the time the account reaches collection, hasn't the collection agency paid the original debt holder? The collection agency would have to make a profit on its original purchase, wouldn't it?

[CATCHMEIFYOUCAN]

Just my 2 cents

I thought I read somewhere, if you settle with the creditors than you are liable to pay taxes on the forgiven debt? I would think its best to just declare BK (no future problems of any creditors .. collection agency coming after you ever again on their debt if you file)

Catchmeifyoucan

[HHM]

Interesting. But by the time the account reaches collection, hasn't the collection agency paid the original debt holder? The collection agency would have to make a profit on its original purchase, wouldn't it?

But they purchase it for far less than the original debt. Also, there is a difference between "debt purchasers" and 3rd party collection agencies. Debt Purchasers buy the debt from the original creditor after the original creditor charges off the account. Depending on the age of the account, the purchase price can be anywhere from a few cents on the dollar (for really old accounts) to 50+ cents on the dollar for relatively young accounts.

3rd party collection agencies merely "represent" the creditor in collecting the delinquent account...and will get paid a percentage of whatever they can recover.

In any event, whether your dealing with a debt purchaser or 3rd party collection agency, they are more apt to do a settlement than the original creditor. However, from the debtor's perspective, because of the income tax issue and the fact that most debtors that are having problems don't have the lump sums of cash sitting around to settle the debts, BK is 9 times out of 10, a better option.

[Spartan]

My MBNA cc was charged off and sold to a third party. An original balance of $22k, became $45k owed to the third party. The same thing happened with 2 others MBNA cc. All in all, I went from owing around $85k to owing $145k now. I think they just continue to compound the interest at 25% APR. The only chance they will ever see such amount of money is IF and WHEN I win the PowerBall.....


In regards to the IRS issue, there is an escape clause. If at the time of settlement, you are insolvent, then you don't owe taxes on the amount forgiven.

[Quandary]

Is it wise to forward settlement letters from one credit card company to another as evidence of agreed-upon settlement terms? One creditor has requested I fax evidence of my negotiated settlements before they will accept my proposal. Any advice would be much appreciated. Thanks.

[GoingDown]

Is it wise to forward settlement letters from one credit card company to another as evidence of agreed-upon settlement terms? One creditor has requested I fax evidence of my negotiated settlements before they will accept my proposal. Any advice would be much appreciated. Thanks.

I don't see a problem with that, but make sure get any settlement agreement in writing with not only the third-party debt collection agency, but also with the current creditor (which might be a junk debt buyer, or it might be the original creditor).

Otherwise, you might end up paying off a small portion of the debt to a collection agency which will then forward your remaining debt to a different collection agency, who will then come after you for the balanced of the debt. This has happened to a lot of people because they didn't get the settlement offer in writing directly from the actual creditor.

And if you're counting on the I.R.S. to play nice and not come after you for the amounts forgiven by the creditors, you're dreaming. I would think you would have a hard time proving you were insolvent if you could afford to settle all your debts. Bankruptcy is probably a better option for you.

[GoingDown]

I recently got an offer to settle a judgement (cc). It is 4 yrs old. They want 40 cents on the dollar. I guess that is the initial opening negotiation. Too bad. Even if it is 10 cents on the dollar, I would still be better off filing and get all other taken care of at the same time.

That's interesting that they are offering to settle a judgment. When they do something like that, it usually means that they are desperate because they can't find any affordable, practical way to enforce the judgment against you-- perhaps they can't find any wages to garnish, or they can't find any real estate property to put a lien on.

And yes, I agree. Filing BK is your best option in this case, too.