See also, all of my articles on collection agencies.

Now keep in mind that debt that is discharged due to bankruptcy is not considered forgiven debt, according to Publication 908. So if you filed bankruptcy on some debt, those forgiven debt amounts are not considered income by the government. However,

If the amount of debt you owe is greater than your assets, meaning you are insolvent, the IRS does not require you to report the forgiven debt. But, you cannot exclude any amount of forgiven debt that is more than the amount by which you are insolvent.

So if you owed Bank of America $6,000 and they settled for $2,500 (you lucky dog), then you could expect a 1099-c from BOA explaining the forgiven debt of $3,500. See also, How to Settle Your Debts on Your Own.

What if you decide not to report it?

Hey no problem if you don’t want to claim this forgiven debt as income… however, you should know that the IRS was also given a copy of the 1099-c by BOA… so they know about the income. Maybe they’ll just flag you for an audit.

3 Instances when you don’t have to claim forgiven debt

This is from www.3debtconsolidation.com

There are 3 situations under which forgiven debt is NOT included in your taxable income:

1) Battled Contest
If you dispute an amount charged on your credit card and win the debt settlement, you are excluded from the Discharge of Indebtedness (DOI Income) rule. For example, Visa might say you owe $1500 in credit card debt due to a recent purchase of expensive shoes. You know you haven’t purchased those shoes and dispute the bill and the court case goes on for weeks. In the end, you agree to pay Visa $150 to reach a debt settlement. Since your debt owed has legally been reduced from $1500 to $150, you would be liable for the DOI income rule. However, since you won this case by a protest or a dispute (in court or verbal settlement), you are NOT required to include this amount as part of your taxable income.

2) Bankruptcy Declaration
When you’ve declared bankruptcy and are making for example only 10% of the original debt payments you owed, the other 90% is excluded from the Discharge of Indebtedness Income rule.

3) Insolvent Financial Condition
When you are insolvent, meaning your liabilities owed exceed your total assets, you are not required to pay any tax on any debt reduction or debt settlement benefits you receive.

Discuss this article and meet new people at Debt Prison Forums.

Related Articles

* Will Debt Follow you Abroad?

* What is a Junk Debt Buyer?

* Restrictions on Wage Garnishment for Debt Collection.

* The Fair Debt Collection Practices Act

* Reasons not to file Bankruptcy or Settle Your Debts

* Can you go to jail for not paying your debts?

* How to settle your debts on your own

* How to deal with collection agencies

* Sample Debt Validation Letter

**Disclaimer – Debtprison.net does not administer legal or financial advice. The contents of this website are my opinions on collection agencies and how to deal with them. Nothing on this website should be interpreted as legal advice or council. No opinions on this website should be used to replace the advice of your financial advisor or your legal council.

Luckily she got everything in writing.  Now here we are a month later and just as I suspected the original creditor sent her a bill for the remainder of the debt.  She correctly handled  this situation by following a few important steps.

1) She contacted the original creditor to insure that the collection agency legally represented them (the creditor).

2)  She documented the names and positions of the representatives and supervisors with whom she spoke to on the phone (original creditor). 

3)  She requested that the collection agency fax her a statement saying that this settled amount would 100% satisfy this debt and that the loan would be reported as ‘paid in full’ to credit reporting bureaus.

4)  She then called the original creditor to insure that they agreed to these terms and documented the phone call with their names, their positions, their supervisor’s name, and date of conversation.

Now a month later, despite having a letter and documented phone conversations, she sends me the following email:

Hi Barry, It’s me again. Guess what? Yesterday my daughter received a bill from the credit card company for the balance of the debt that supposedly was closed and settled. I have the names of the people that we spoke to at the CC co. back in May saying that the collection agency we were dealing with was authorized to offer us a settlement for them. I also have the letter stating that the account was closed and paid in full. Now what? Thanks 

My advice to her was to contact the credit card company and inform them that they have made a mistake.  Obviously they have simply made an accounting error which led to this miscalculation on their part.  I would then stay on the phone with them until this matter was settled.  She’ll probably have to end up faxing them the very letter that they agreed to honor just a month earlier.  Bear in mind this is no small credit card company, this is Chase Bank.  Luckily she got this agreement in writing.  And since she documented the phone calls (where they stated they agreed to the terms that the collection agency put forth on their behalf) she should be able to force them to honor the contract to which they agreed.

However, before this matter is behind them she may very well have to hire a lawyer to force them to honor a contract that they produced. Or this credit card company may sell this ‘outstanding debt’ to another collection agency for pennies on the dollar.  The faster she forces their hand the better….

**Update
After having to mail the copies of their settlement agreement to Chase Bank… twice – it appears this affair is over. Chase mailed her a letter stating the account had been settled. So, for now, the matter appears to be closed.

Discuss this article, share ideas, and meet new people at Debt Prison Forums.

Related Articles

* The Fair Debt Collection Practices Act

* Reasons not to file Bankruptcy or Settle Your Debts

* Can you go to jail for not paying your debts?

* How to settle your debts on your own

* How to deal with collection agencies

* Sample Debt Validation Letter

* Information on Credit Card Balance Transfers

* How I Escaped Credit Card Debt

* What You Should Know About Credit Cards

* How to seek bargains for food and clothes

**Disclaimer – Debtprison.net does not administer legal or financial advice. The contents of this website are my opinions on collection agencies and how to deal with them. Nothing on this website should be interpreted as legal advice or council. No opinions on this website should be used to replace the advice of your financial advisor or your legal council.

Bankruptcy is a permanent negative mark on your credit file

Bankruptcy is bad for a variety of reasons. First and foremost, it means your going back on your word. If you aren’t the type of person that is interested in honoring your commitments then this article isn’t for you. By all means – go ahead and give your money to some lawyers. But if honoring your word means something to you, then relax and take a deep breath, everything is going to be O.K..

Bankruptcy is a life changing experience. You’ve seen the loan applications that have that question ‘Have you ever filed bankruptcy?’ It doesn’t specify in the last seven years. So once you go down that road, you’re branded as untrustworthy or High Risk. Don’t get me wrong. Eventually your credit score will improve and you’ll be able to borrow money again. But bankruptcy should be the last option – only after you’ve honestly tried every other avenue and failed.

Bankruptcy lawyers represent you in bankruptcy court. Since these lawyers make a profit off your financial crisis, I would recommend speaking to them last.

A judge could very well confiscate all your assets and sell them, giving the cash to your debtors. If you stopped frivolous spending, worked two jobs, and sold everything you didn’t need – could you avoid bankruptcy? If the answer is yes then it’s time to put together a plan. Becoming financially disciplined is a skill that once mastered, keeps your life on the right financial track. Avoiding bankruptcy and working hard to overcome your debt will have a positive effect on your life, financially and emotionally. See also DebtPrison related article How to deal with collection agencies.

Debt settlement strategy – avoid third parties

Perhaps you’ve seen the commercials on television. Some nice financial do-gooders who are going to help you lower your monthly note while at the same time settling your credit card debts for a fraction of what you owe. It seems like such a wonderful idea. Basic premise: you save money while sticking it to those BMW driving Bank CEO’s. I have to give this subject some extra attention. Bankruptcy and settling your credit card debt is a large part of the problem driving today’s high credit card rates. After I failed to pay Bank of America and Citibank for three consecutive months my interest rate went from 21% up to 32.6%. This is called the default rate and is applied to a customer when they become High Risk.

Believe me I was angry and wrote them letters requesting it be lowered. Of course they didn’t and looking back I don’t blame them. Basically the Bank is using me to settle the score against the people that do in fact file bankruptcy or settle their accounts. Since they are losing money by loaning to those High Risk customers they need to recoup it from others. Hence 32.6% default rate.

The Banking sector in today’s market is without a doubt one of the most profitable endeavors. American culture has convinced everyone that they need anything they want and now (when they can’t afford it) instead of later (when they could afford it). Banks are not all bad. They keep this monster machine rolling. People can build houses and buy cars because of banks. Our economy is dependent upon them and they should be profitable. This doesn’t make me feel all good inside either but it’s still what makes the cookie crumble. The point is that this default rate is necessary. Not to mention that it wouldn’t be my problem if I had been more responsible in the first place.

The problem with using the financial do-gooders is that they fail to mention the negative consequences of using their service. Back in the summer of 2005 I called one of these companies I had seen advertised. A person answered the phone and asked me some questions about my income and my bills. In three minutes she had concluded that I was eligible to be in their program. It happened so fast I felt like I was another victim of a high pressure sales presentation.

Under the guidance of their opportunistic lawyers I would pay their company $600 per month. Of this $600 they would keep $60 for themselves (handling fees?) and the rest would go into an account which they would watch over for me. When this account had reached a certain amount, they would make the first Bank an offer. For example, I owed Bank of America $6,800. Once my account has about $3,500 they make Bank of America an offer to settle at roughly 50%. It becomes a bargaining game as Bank of America shoots for a higher percentage.

These lawyers (negotiating on my behalf), tell Bank of America that if they don’t take the offer then this money will be offered to Citibank as a settlement and they might accept it. This means that Bank of America may be looking at another year or two before they get another offer from me the client! If you are like me then you’re probably asking yourself Why can’t I just do this myself and keep my money? You can.

What’s bad about this is that you’re now giving money to a third party that could be applied to your debts. And this third party now has ALL of your money. Does that sound like a good idea to you – someone else having all your money? In the package that these lawyers sent to me, it described the manner in which I could confiscate my funds away from them, if in the course of things, I changed my mind and wanted my money back. From what I can remember reading it didn’t sound like fun.

Also, while all of this is going on, your credit history and score suffers. And even once the balances are settled, you’re still left with a gaping hole in your credit report. This means that on future loans you’ll pay a higher interest rate. Paying a higher interest rate on future loans will prove more costly than paying what you owe and salvaging your credit now. Not to mention, while your money is growing in their account the interest and fees are still being charged to the money you owe Bank of America.

So what started out as $6,800 one year later is now $10,220! Once I received this packet of information (which I paid $50.00 for) I realized there was even more for me to worry about. It stated that monies I owed Citibank could not be settled – so I would still owe Citibank the full amount. It was actually an AT&T Universal credit card. But as it turns out, Citibank had bought them out some time ago. These professors of law and good will didn’t tell me this – I found out about it on my own.

That was enough for me! No third parties. They make your life worse while profiting off your ignorance. My advice is to fight for your credit. Don’t take the easy way out. Busting your tail to pay off ALL of your debts might be tough, but you’ll salvage your integrity and your credit report. Hope this article helped.

Discuss this article, share ideas, and meet new people at Debt Prison Forums.

Related Articles

* How to settle your debts on your own

* Can you go to jail for not paying your debts?

* How to deal with collection agencies

* Sample Debt Validation Letter

* Information on Credit Card Balance Transfers

* How I Escaped Credit Card Debt

* What You Should Know About Credit Cards

* How to seek bargains for food and clothes