Credit Card Debt Survival Guide

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Chapter 5: Credit Card Debt Settlement

1099-C Issuance scroll down

Two Debt Settlement Publications scroll down

Interviewing Debt Settlement Resources scroll down

Agreement to Settle a Debt

Get it in writing. Draft it. Sign it. Email it. Have it signed and faxed back to you. Or, have it signed, scanned and emailed back to you. Here is a letter/contract similar to one in Credit Infocenter’s pamphlet, How 2 Settle Your Debts. There are several other settlement letters in this 42-page pamphlet. It is still worth its low $11.95 price. This is an example of the agreement you need to get in writing before making any lump sum final payment on a credit card debt.

This contract shall serve to spell out the terms of a settlement offer between <your name>, hereafter referred to as debtor and <credit card company’s name>, hereafter referred to as creditor on account number _______________________.
Upon receipt of an acceptable form of payment from the debtor for $______________, the creditor agrees that the balanced owed on account number _______________ is zero, and that no further payment or fees are due from the account at any time in the future. In addition, the creditor agrees to remove any references to late payment or charge off regarding this account from <insert your name>’s credit file.
This contract supersedes all others between the debtor and creditor.

_______________________________________________ Date: ___________
Debtor’s Signature

I attest that I am authorized to make decisions regarding the making and acceptance of settlement offers for outstanding credit card for the <credit card company’s name> company.
Read, Approved and Accepted by: ____________________________________
Signature of Creditor’s Authorized Representative
Date: __________

1099-C Issuance

It is important to note that you will be liable for the tax on the income of the unpaid portion of settled debts. The bank is required to issue an IRS Form 1099-C on that portion of the debt.

This is a time when insolvency can work in your favor. If you can settle in a year when you have little or no income and few assets, your 1099 tax liability for that year will cost you little or nothing. Your 1099 liability is for the year the 1099 is issued, not five years ago when your account charged off and you were virtually insolvent. So if you go back to settle your debts when you are not insolvent, you will be liable for the tax on that income.

A 1099-C for cancelled debt must be for principal only. Interest is not taxable. If the form sent to you by the original creditor has an amount that obviously includes interest, request a new form, or contact the IRS to dispute the total forgiven amount taxed.

Once the debt is sold, the likelihood of receiving a 1099 is reduced. Junk debt buyers simply sell the debt rather than going to the expense of discharging it and issuing a 1099. While it is not advisable to settle with a junk debt buyer, if you do, you should insist on getting a 1099 for the balance, less the bogus interest and other charges. Otherwise, the balance will be sold to another junk debt buyer, and another negative credit listing could result.

Two Debt Settlement Publications

http://www.zipdebt.com/ a DIY debt settlement program for as low as $197 with a 365-Day Money Back Guarantee (with coaching available for more money).
Credit Info Center’s debt settlement pamphlet for only $11.95 with settlement letters for different situations.
http://www.credit-book-store.com/pd_settling.cfm.

Interviewing Debt Settlement Resources

Unfortunately some people do not have the time or the inclination to attempt settling their own debts. Despite all the negatives, are there reputable debt settlement firms out there who can help them?

First, before interviewing debt settlement firms, try to find a law firm, or an individual attorney, who will agree to settle your debts on a contingency basis. The Fair Debt Collection Practices Act requires debt collectors to work through the consumer’s attorney. Even if it is an original creditor (Original creditors are not covered by the FDCPA.), the consumer is less likely to be sued if negotiations fail after an attorney’s involvement.

Whether it is a debt settlement firm or a consumer debt settling attorney, you should ask:
How are your fees structured and how are employees paid?
Fees are either charged up front before any debt settlement takes place or they come after settlements agreements and are based on the amount of debt reduction. You should only pay fees based on settlement agreements. And, do not do business with any debt settlement company that pays commissions.
How much experience do you have?
Knowledgeable sources say the minimum amount of experience should be three years.
Where will my payments be held?
The answer should always be in a FDIC insured trust account with a third party escrow company.
How long will it be before I see results?
If they say immediately or more that 12 months walk away.

Will I have to pay taxes on the unsettled amount?
When the creditor issues a 1099-C form to the account holder, that is the gold standard of documentation of the settlement agreement. (Unpaid amounts of “settled” debts are frequently sold to junk debt buyers and resurface with another collection agency down the road.) Unfortunately it also means the account holder owes the IRS income tax on the forgiven amount. If the 1099 is issued in a year when the consumer had little or no income, the IRS may not collect on the tax owed from the 1099.
Will my credit score be affected?
If they say no, do not believe them. Debt settlement involves not making payments and saving that money for a lump sum payment. That process will bruise your credit score.
Stay strong and do not fall prey to the seductive sales pitches of debt settlements promising to get you out of debt in as little as a few months.

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