Never Pay A Debt Collector The Full Amount

[IHateToBeEmo]

May 12, 2011

The dirty little secret of debt collecting is that most of them are not working directly for the original company you ran up the debt with. They're an outside third party and they bought your debt for pennies on the dollar. The debt collector's goal is to get the most money out of you for the least amount of effort. This means all you have to do to make this calculus work to your advantage is settle with the debt collector for around the same price he paid to buy your debt. So start low.

Make an offer like 30% of what you owe. Or somewhere between 10 to 25 cents on the dollar. If you owe $1,000, offer to pay $250. If you owe $5,000, see if they will take $500. At this point it's all in the art of the deal and how good a haggler you are.

A few things to remember. First, you'll want to make sure that you really do owe the money and these guys really have the right to collect it. Second, a settled debt will still show up on your credit report as a negative item, whether it's reported as being settled or as being charged off.

But after you get over those humps, play let's make a deal and see how low you can get them to go.

http://consumerist.com/2011/05/never-pay-a-debt-collector-the-full-amount.html

[keepsmiling]

Somewhere in there, possible tax consequences should be mentioned. If there is retirement money, it IS counted as an asset for purposes of taxes on debt forgiveness. This is what stopped me dead in my tracks.

[chrisdfw]

True, most people have negative net worths and owe taxes but if you have more assets than debts you won't owe taxes, I also disount the value of retiement assets when figuring net worth since taxes are owed on withdrawals.

As a general practice I advise people to discount their retirement assets when trying to determine their assets, it keeps epople from geting the idea they have more than they really do. Its a little depressing but accurate.

[debee]

The IRS has an insolvency worksheet in Publication 4681 (click to view, scroll to page 6) that gives all the allowed categories and not surprisingly, they don't let you reduce your investment balances by taxes you would owe on withdrawals even though it seems logical that they should.

[keepsmiling]

True, most people have negative net worths and owe taxes but if you have more assets than debts you won't owe taxes, I also disount the value of retiement assets when figuring net worth since taxes are owed on withdrawals.

As a general practice I advise people to discount their retirement assets when trying to determine their assets, it keeps epople from geting the idea they have more than they really do. Its a little depressing but accurate.

Probably too late to edit that first sentence but to clarify: reverse that assets/debts statement. In case anyone was getting excited lol.

I had made the assumption - and we all know you should never assume- that retirement $ was exempt from this calculation, in the same way it is for bk. DEAD WRONG.

[chrisdfw]

The IRS has an insolvency worksheet in Publication 4681 (click to view, scroll to page 6) that gives all the allowed categories and not surprisingly, they don't let you reduce your investment balances by taxes you would owe on withdrawals even though it seems logical that they should.

I know they don't endorse it, but I'd suggest doing it anyway. I'd have to do some research and find out if it has ever been litigated. But the liquidation value of a retirement plan should be reduced, however it isn't for estate taxes even though it should, so it might no here either, it doesn't have to make sense its the IRS.

[debee]

I know they don't endorse it, but I'd suggest doing it anyway. I'd have to do some research and find out if it has ever been litigated. But the liquidation value of a retirement plan should be reduced, however it isn't for estate taxes even though it should, so it might no here either, it doesn't have to make sense its the IRS.

I thought your reasoning made perfect sense. In terms of real money to the person who's determining their net worth, it makes sense to deduct taxes. In most cases, the debtor could probably do it and it wouldn't matter. The difficulty only exists in the event of an audit. Your approach makes sense to me on every level, but there's an element of risk. Small risk, but still risk. That's all I was thinking.

[LostItAll2]

Everything would have a risk wouldn't it? That's the way I would look at it.

[debee]

Everything would have a risk wouldn't it? That's the way I would look at it.

The risk here is that if/when you get audited by the IRS, and it turns out you reduced your assets by taxes you had not yet paid, you would then have to recalculate your assets and if if you were not insolvent as claimed, then you would owe not only taxes, but also fines, on the forgiven debt.

I wouldn't do it myself. To me it makes more sense to just fill the forms out correctly and know for sure whether you will have a tax debt, but I guess it's a personal decision.

[catleg]

One idea if you have a regular IRA would be to do a Roth conversion on it, and pay the taxes out of the IRA funds.
I think if you have a 401k you're stuck.