The issue of debt settlement continued for my clients today as one informed me that with about $86,000 in outstanding unsecured debt, the credit card companies have continued to reduce their settlement offers to an average of 14% across the board. In sum, if he can come up with $12,000 as lump sum payments these accounts would be "settled".
He was very enticed but with my previous warnings he asked each of them about the debt forgiveness 1099 that he would receive-- and on which he would be paying taxes. The math shows that $74,000 is income (i.e. the debt forgiven amount equals income). This sum is taxable! The collectors all admitted that a debt forgiveness 1099 would be issued, but one ingenious collector offered that my client should parcel all this out over two or three years of settlement and that would spread his taxes over time. Seduction continues...
My client is insolvent in the bankruptcy sense. He could file a simple chapter 7 in Iowa and get all this debt discharged--even though he has a homestead with a lot of equity in it. The Iowa homestead exemption is unlimited against all unsecured debt incurred after the homestead was initiated. So the creditors can't get at that equity.
A person who can show they were insolvent when the debt was forgiven can file Form 982 IRS and attempt to convince the IRS that the forgiven sums are not taxable. Filing a Chapter 7 bankruptcy is a way under the law for no debt forgiveness taxes to be due. However, if there was no bankruptcy, the entire value of the house would be considered an asset. In this case, there is a valuable house worth about $300,000. Now, subtract the liens of $120,000. The IRS would argue that my client is not insolvent. He is totally in the black with $180,000 in equity--which is not seen as exempt in this context So filing the bankruptcy would be an advantage while not filing would create taxes on $74,000 of debt forgiveness income. In short, my client would be in trouble because those are taxes that could not be discharged for years--and in the meantime, the IRS would be actively pursuing ways to collect the money even if the client claims he does not currently have any. Add in late fees, penalties and interest and the amount becomes exorbitant.
So the bottom line is do not listen to debt collectors. They will not generally offer the full story and the hidden downsides of the settlement. In fact, they often trick you into settling--which turns out not to be a real settlement at all.
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Iowa
Comments
I am Arthur Adams a financial writer. I write on several finance(credit card payments,debt consolidation,h ome loans,personal loans,student loans,loan repayment,bankr uptcy laws,mortgage,m ortgage rates,mortgage application etc) related topics.
I came across your site(liptaklaw.com) while surfing through the internet to find a suitable site for writing articles. It is highly resourceful with rich and nice contents and has a vivid presentation. I must appreciate your hard work and wish you good luck.
I was wondering if you can allow me to write for your blog. I assure you to provide you an absolutely unique but relevant article(of 300 words) so that it proves to be useful to your readers.
I wish you consider this proposal and will wait for a positive reply from you.
If you are displeased with my email, I cordially regret in advance.
My Kind Regards,
Arthur Adams
ping me at arthuradams011
I am Ivan Sanchez, a financial writer for many communities and I write articles on various topics related to Finance. I went through your site: liptaklaw.com and I acknowledge the interesting and informative content and appreciate the vivid presentation as well. Hence I propose you for a "Guest Post" in your site.
It would be a great pleasure if you allow me to write for your site.
I assure that the article would be absolutely original and will be published only on your site. If you want you can suggest us a topic and we write an article for you on that topic.
Hope to hear from you.
Thanks,
Ivan Sanchez
snchz.ivan