Debt settlement is one option to consider when trying to resolve debt issues. However, sometimes this option may not the wisest option to choose. It will be a good idea to meet with a bankruptcy lawyer to weigh all your options first, including debt settlement or bankruptcy.
There is an entire industry focused on debt buying and debt collecting. Often, a credit card account or other account, may be sold off to a third party, known as a “junk debt buyer.” The junk debt buyer may offer the debtor a discount to paying off the debt; and sometimes these discounts are rather steep. In some cases, settling a debt in such cases may prove beneficial. However, many of these cases are rife with problems, which may include:
1. Settlement May Create Taxable Income: If a debt is settled, the amount that remains may be cancelled by the debt-holder. If this amount is over $600, the debt-holder may issue you a 1099c, which becomes taxable income. For example, let’s say you settle a $10,000 debt for $4,000. The remaining $6,000 is cancelled by the debt-holder, creating a taxable event for you. You may need to add this $6,000 onto you income base and pay taxes on this amount (if you are insolvent, there is a way to potentially waive this taxable income; this will be addressed in another post).
2. Settlement May Not Release Liens on Property: If you own real property (house, land), and a judgment is entered against you, that judgment becomes a lien against your real property. If you settle a debt that has gone to judgment, in such cases, it is imperative that you obtain a satisfaction of judgment and full release of any liens. I have encountered a debt-holder, once, who only wanted to settle the debt, and not release the accompanying lien. Needless to say, we did not agree to that settlement!
3. Debt May Not Be Legitimate, Part 1: There is a statute of limitations in Oregon for contracts of 6 years. From the time you default on the contract or from the time you made your last payment, whichever happened most recently, the creditor has 6 years to obtain a judgment (where they sue you). In some cases, debt-holders will try to collect a debt that is time-barred, meaning that the creditor cannot obtain a judgment from you. It is important to find out when the account went into default and when the last payment was made on the account. In such cases, you may not want to settle a debt if the debt-holder has no recourse to go after you other than calling and sending you collection letters.
4. Debt May Not Be Legitimate, Part 2: Many times you have third parties trying to collect on a debt; you have never heard of these parties, and frankly, just receiving a collection letter from these companies does not establish the fact that they can collect on these debts. Under the Fair Debt Collection Practices Act (FDCPA), you can request that third party debt collectors verify the account, i.e. that they have a right to collect on it (usually evidenced by a contract), that it is not time-barred, specifics about the debt including where it originated, what the interest and principal, was, etc. Sometimes we send a verification letter, and never hear back from the creditor.
5. Settling Debt Might Not Resolve All Debt Issues: You may find that one debt-holder may settle an account; and you pay the debt-holder off. Then you move to the next creditor. This debt-holder refuses to work with you, and requires full payment. Ultimately, in some cases, you may have to elect to file bankruptcy because other creditors will not work with you, even though you may have had success at negotiating your debt downward at the beginning.
If you would like to set up a free consultation with a bankruptcy lawyer to discuss bankruptcy and other options, please feel free to call .