Debt settlement pitfalls and issues, get it in writing

When deals look too good to be true, they probably are. Credit card companies and bill collectors may reach out and offer settlement “deals” to customers who owe them money. Unfortunately, many dishonest bill collectors out there make deals with customers and then completely fail to honor those agreements once the money is paid. With some collection agencies, the customer must be late in their payments to qualify for a partial settlement. If you qualify for a settlement with a partial payment, and you make an agreement over the phone, enforcing that agreement can be difficult. There may also be income tax consequences and liabilities for settling debts for less than you owe, and in many instances, the creditors do not tell people about tax consequences.

Creditors may offer partial settlements when they are otherwise ready to file a lawsuit against you.

The companies who own the consumer debt you owe, on a credit card, for example, have a limitation of five years to file a lawsuit in court to seek a judgment against you. Having said that, they can continue with debt collection forever if they do not obtain a court judgment. If the debt has been unpaid for years, and it is getting close to the time when the collector has the option to file a lawsuit against you, they may reach out and offer a settlement of the debt you owe, sometimes taking 50 to 70 percent off the entire balance, if you pay in full. At the time, if the creditor is threatening a lawsuit they are doing so because they think you will pay the settlement amount to avoid a trip to court and a judgment entered against you.

Make sure to get the deal in writing.

The deals many creditors offer requires the partial payment to satisfy the debt be paid in one lump sum. Others may accept payments over a short time, but the overall deal will not be as good. It is very important, if you make a deal with the creditor, to pay a partial amount in settlement of the entire debt, that you get an agreement in writing. Too often, the deals are made over the phone and once the creditor receives your partial payment, they sue you anyways or continue trying to collect from you, even when you thought you had an agreement.

There are credit score and potential tax consequences of settling a debt.

The policy of some credit companies is to offer settlements once debts have become delinquent, either 60 days or longer. If you have a high credit card balance and interest and you have been paying on time, your credit score might have to suffer late payment marks before you may be eligible to participate in a deal to settle your debt for a partial payment. Likewise, with the necessity to get the agreement in writing, make sure the agreement states that the creditor will promptly notify all the credit agencies.

The IRS considers a debt owed, that is written off, to be income. Income from a settlement that exceeds $600 must be reported when you file your taxes. Most creditors in the business of collecting and settling debts will send you an IRS Form 1099-C to file with your taxes, reflecting the write off amount as taxable income. It is important to keep track of tax liability for settled debts, to protect yourself in the event the creditor never sends you a form, or sends a form to the IRS but not to you.

Bankruptcy can be an alternative to court judgments and collection agreements.

While some bill collectors will work with customers and give them written agreements with fair terms, many others take what they can get and run, or sue you anyways. If you do get sued for a debt collection and the company is threatening to take your property, wages, tax returns or more, a Chapter 7 or 13 bankruptcy filing can stop them in their tracks. As soon as bankruptcy petition is received by the bankruptcy court, the automatic stay provision takes effect, making it a federal crime for a collector to continue pursuing collection efforts against you while you are in bankruptcy. You may be eligible for a Chapter 7 full discharge, or a Chapter 13 structured reorganization plan, paying debts back over time, often pennies on the dollar.

Joseph Wrobel, Ltd., works with clients on consumer issues including bankruptcy and they can offer additional information to find out if you qualify for Chapter 7 or 13 bankruptcy, and your options and rights under the law.

Joseph Wrobel, Ltd. helps people get control of their finances and a fresh start at financial freedom. The firm’s website contains informative videos about financial issues as well as bankruptcy protection for families who want a fresh start.

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