Iowa Bankruptcy Lawyer, Robert J Liptak - Bankruptcy Attorney in Iowa

When you get seriously behind in payments of unsecured debt, such as credit card, charge card or medical debt, there are heightened efforts by the creditor or a third party debt collector to squeeze the money out of you.  They use many tactics to try to accomplish this--from term negotiation and debt settlement to law suits with judgments and wage garnishment.  The reasons why the creditor chooses one line of attack over another does not always make sense even to bankruptcy attorneys.  There are lots of variables and internal business policies that lead to the chosen tactic, so it it hard to predict.  

One weapon that is often used is the so called debt settlement offer.  Let's say you owe $10,000 on a credit card and it went into default.  The company or its debt collecting goons call and attempt to get you to pay the entire amount.  Now, of course, you would have not gone into default if you could have even kept up with the small minimum monthly payment compared to a lump sum of $10K.  But they demand that anyway.  You can't pay.  They continue to call and may get intense for a while--rude, crude and harassing,  At some point however (when they realize you aren't going to pay such a large amount) you are usually offered an opportunity to pay only a fraction of the entire amount owed. This often happens near the end of the month when the collector's monthly quotas need to be reached. This can be very enticing.  It sometimes starts at 80% of the total owed, but you don't have $8K either. 

So that gets rejected and over the ensing months the process continues--60%, 50% and if there is no plan to sue you, get a judgment and garnish you, then they may even come down to 20%.  Now that is a lot more enticing.  What if you can get $2K and get rid of $10,000 worth of debt?  Wouldn't that be great?  It is a huge savings, the creditor is off your back and you won't have to deal with this thorn in your foot any more.  So you sell something, borrow from a relative, take out a loan from your IRA or 401 (k) or make a loan against the equity of your house or title of your car.  You work diligently to somehow come up with the money and pay the $2K to the creditor.  So it's all good, right?

Actually, wrong.  Besides the errors in doing any of the aforesaid ways to get the money (which are dealt with in other Liptak Law blogs) you still defaulted on a legal contract.  Even though the company accepts the $2K, the contract still says you owed a total of $10K.  What they do behind the scenes, more and more often, is sell the balance to a third party for pennies on the dollar.  The new collector waits for a while (could be years), gives the account some new numbers, re-dates it and reports it to the credit rating agencies.  After a suitable amount of time goes by you are approached by the new collector who demands the $8K.  After your finally realize that this was related to the debt you settled, you raise the settlement point.  Well, unfortunately, you still legally owe the $8K and the new collector will start the collection negotiation, settlement or suit process all over again--and you do not have a leg to stand on. In fact, adding more contractual collection costs, interest, late fees and penalties (and depending on how much time went by) you could actually owe much more than the original $10K that was claimed as owed which you thought you settled. (Bankruptcy lawyers call this zombie debt).

But let's suppose this horrible outcome does not happen to you.  Thank the lord.  However, what will happen by law is that you originally paid only $2K for $10K that you contractually owed.  In other words, the "gracious" creditor forgave you $8K worth of debt.  What they did not tell you (as often occurs when you hire a debt settlement company too) is that the following year you will receive a debt forgiveness 1099 from the creditor, which of course is reported to the IRS.   What does that mean?  It means you have $8,000 in additional income and have to pay taxes on it.  Well, being in an economic hard place has just gotten worse as an unexpected bill to the IRS means additional taxes--money you likely do not have. This is a frightening circumstance for many people.  You may be able to get out of this if you are insolvent per IRS form 982.  But you certainly are in an uneasy spot.  

Debt settlement is not what it may be marketed to be.  See an attorney before you take this step because the initial cost (for the legal fee) could offset the real costs to you down the road.

Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa