If you live in Texas and are having problems paying your debts, you have some specific protection from debt collectors that other states don't provide!

In other words, "DON'T MESS WITH TEXAS"!

What is the Texas Homestead Law?

Texas Homestead Law exempts your primary residence from creditors in bankruptcy as well as from debt collectors.

This includes a home or condominium as well as improvements such as:

• swimming pool
• hot tub
• barn
• water tower
• pumps
• roads
• and other affixed items

A Texas resident mus file a HOMESTEAD DECLARATION (form filed with the county recorder's office).

Essentially, a debt collect cannot file a lien against a homeowner's primary residence in order to attempt to collect an unsecured debt.

Can Wages be Garnished in Texas?

Again, residents of Texas have some advantages that other states don't have, in that a debt collector cannot garnishment wages for debt collection in Texas.

This DOES NOT apply to:

• Unpaid income taxes
• Alimony or child support
• Federal Student Loans

Employers can find information about wage garnishment limits and exemptions in Texas at:

www.twc.state.tx.us.

Texas provides some of the best protection from creditors of any state and allows those who are in financial trouble to seek relief through DEBT SETTLEMENT without the fear of wage garnishment and/or a lien on their homestead.

If you would like to know how to settle your debts for less than you owe, let us know!

photo by: Jamiesrabbits

Making the choice between BANKRUPTCY and DEBT SETTLEMENT can be a daunting task.  The fact is, one is not the clear winner.  The option you choose will depend on several factors.

Here are some guidelines to determine whether Bankruptcy or Debt Settlement is the right choice for you. 

DON'T THINK OF BANKRUPTCY AS A "GET-OUT-OF-JAIL-FREE-CARD"!

As I research and blog about the debt settlement industry I'm in, I see too many sites that seem to say that Bankruptcy is an easy way to START OVER.

That statement is both True and false.

Before we look into when you should choose Bankruptcy over Debt Settlement, just remember this...

Bankruptcy is a statement that you cannot pay the debts you owe.  Say what you will, that is a hard thing to admit and can cause severe personal turmoil.  Although most people who have to seek bankruptcy protection from creditors do so as a last resort, it is still a very big and tough decision mentally.

DEBT SETTLEMENT IS NOT THE SAME AS BANKRUPTCY

Whether you qualify for a chapter 7 or 13 (personal bankruptcy), you are basically walking away from the debts you have incurred.  Your creditors get paid back very little, if anything on the money they originally loaned you with your promise to repay!

With DEBT SETTLEMENT, your creditors will get paid back approximately 50% of what you owe.  This is better for you because it shows that you made an effort and paid back at least a portion of what you owed.  Down the road, it will be easier for you to get credit when you need it.

BANKRUPTCY WILL SHOW ON YOUR CREDIT REPORT FOR UP TO 10 YEARS!

Make no mistake about it, bankruptcy will have an major affect on you and others!

You may not be able to rent an apartment for up to 2 years following a bankruptcy!

Many employment opportunities will not be available to you if you must state that you have declared bankruptcy in the past or if your prospective employer does a credit check!

Bankruptcy HAS A VERY NEGATIVE impact on your credit score!

In the long run, your credit and credit rating will not be as damaged through DEBT SETTLEMENT as it will be through BANKRUPTCY.

After a debt is settled, the credit reporting agencies:

• Experian
• TransUnion
• Equifax

...will show the debt with a $0 balance and "paid-as-agreed" or "paid-for-less-than-the-full-amount".

When your credit report shows that you have done something to take card of your outstanding debts, it will (believe it or not) start to improve rather quickly!

SO, DEBT SETTLEMENT IS ALWAYS BETTER THAN BANKRUPTCY?

NO!  Again, debt settlement companies that only offer debt settlement have to say that, but it is just not true!

Reputable Debt Settlement companies will discuss all of your options so that you can make the right choice!

After 10 years of helping people get out of debt, I have found that in 99.9% of the time, the client found themselves in severe financial trouble from several circumstances of which they had no control.  Such as:

• Loss of job and income
• Divorce
• Illness and/or disability
• Cut back on the hours of employment due to bad economy
• Forced retirement
• Fixed income that cannot keep up with inflation

At first, you use the credit cards to "JUST GET BY", with the intent on repaying them when things get better.  However, in many cases, things don't get better and now you cannot keep up with the minimum payments.  Then:

• Collectors start to call several times a day (HOW TO STOP CREDITOR CALLS)
• You may be served a SUMMONS demanding payment

You may qualify for a DEBT MANAGEMENT PROGRAM

In a Debt Management Program, you will...

• Have ONE MONTHLY PAYMENT (it may or may not be lower than the total of the minimum payments you now have)
• Have interest rates and late fees are usually lowered or forgiven
• Usually pay back all of your creditors in 48 months or so
• Have improved your credit scores after your balances are $0

But, they question is, can you afford the MONTHLY PAYMENT?

If not, then you need to look at DEBT SETTLEMENT:

• One monthly payment (a payment you can afford based on your circumstances)
• Creditor call slow down and stop
• Creditors are paid a percentage of the debt owed (avg. 50% plus or minus)
• Once your creditors have agreed to a settlement and it is completed, your credit report will show a $0 balance and start to improve

Ifyou cannot even afford the Debt Settlement payment, then you need to consult a BANKRUPTCY ATTORNEY, but be careful!  Not all attorneys specialize in bankruptcy and as the bankruptcy laws seem to always be changing, you must find one that is an expert!

STILL NOT SURE?  WE CAN HELP!  Give us a call at 1-877-492-4109 or simply click on the link below for a FREE Evaluation.

If you find that your debt is out of control, it's always good to get back to the basics.   

DEBT CONTROL BASICS:

A)  DON'T BE A VICTUM OF "EASY CREDIT TERMS"!

We have all been at the check out stand and the sales person asks if we would like to get an instant 20% off the purchase.  All we have to do is just take a few minutes to fill out an application for their store card.

Sounds like a good deal, right?  WRONG

Most of the time, store cards are not a good idea. Let's say that your bill is $100 and with the 20% off it is only $80.  Nice savings.  I bet you are starting to feel like an Extreme Couponer! 

However, if you don't pay the remaining $80 off within 30 days and just pay the minumum payments, you could end up paying 2-3 times as much to finally pay off that card.  Not only that, but store cards often come with high interest rates.  Frugal shopper beware!

B) DON'T BUY SOMETHING IF YOU CAN'T AFFORD IT!

I know this sounds simple, but most people get in trouble with their credit as result of spending way beyond their means!

Here's what happens:

You already have a couple of credit cards charged up to about 70%-80% of the credit limit, and you are making the minimum payments each month without too much effort.

You "really need or want" that item and tell yourself something like "It would only increase my monthly payment by $20 and I can handle that."

                               WARNING!     WARNING!    WARNING!

• Your credit limits will start to be maxed out and that will result in a higher CREDIT RATIO.  Your credit score will decline.
• By the time you repay these cards making minimum payments, you could end up repaying 2-3 times as much as the current balances!
• If you should have a severe financial setback, such as Unemployment, Divorce or Major Illness, you could be in real trouble.

C) CONSIDER A DEBT MANAGEMENT OR DEBT SETTLEMENT PROGRAM.

If you find yourself starting to get into financial trouble because of TOO MUCH DEBT, consider a DEBT MANAGEMENT PROGRAM or a DEBT SETTLEMENT PROGRAM.

DEBT MANAGEMENT is a program designed to:

• Combine all of your payments into ONE PAYMENT.
• Reduce the interest rates and fees.
• Help you pay off all of your cards in about 48 months

But, if you do not quality for a DMP, you should consider a DEBT SETTLEMENT PLAN:

• One monthly payment much less than all of your current minimum payments
• May reduce your balances by 50% or more
• Avoid bankruptcy

If you would like a FREE CONSULTATION with NO OBLIGATION, CLICK HERE!

We all know that using White Out on your credit report won't really fix anything.

Here are a few tips on how to dispute errors on your credit report.

The Fair Credit Reporting Act (FCRA) is a federal agency that promotes the accuracy and privacy of information on consumer's information on the nation's credit reporting agencies.

We are entitled to a FREE CREDIT REPORT once every 12 months (or if you are rejected credit).

You can also call 1-877-322-8228 to order a Free Report or request it by mail:

Annual Credit Report Request Service

PO Box 105281

Atlanta, GA 30348-5281

If you find errors or want to dispute items, you must write or go on line to each credit reporting agency.  Going on line is the easiest and quickest method. Here are links to each of the major reporting agencies:

• Experian
• Equifax
• TransUnion

Basically, you must be able to prove that the information is inaccurate. For example, let's say that you had an old credit card account that was charged off and then wound up with a collection agency.

After being contacted by the collection agency, you were able to negotiate a settlement of the account. Even though you have settled the account, it is still showing a balance.

How do you dispute the error on your credit report?

You will need to provide a copy of the SETTLEMENT AGREEMENT.  Please don't tell me you didn't get the agreement in writing! 

Many consumers will agree to a settlement or repayment plan over the phone, authorize check-by-phone or other form of payment without a written agreement! If this is the case for you, all is not hopeless.  You should be able to find proof of payment from your bank.  So, you will need the SETTLEMENT AGREEMENT and PROOF OF PAYMENT.

The Credit Reporting Agency must contact the creditor or collection agency with the dispute, and you should be able to go online and check up on the progress.  This process will take 30 days or more, so you will need a little patience!

WHAT ABOUT OLD ITIEMS!

Even if you have legitimate, negative items on your report, those items can and should be removed after seven years (or shorter if the statue of limitations in your state is shorter). The same is true for judgments, however, a bankruptcy can stay on a report for up to 10 years.

If you have old, legitimate negative information that older than the statute of limitations in your state, you should dispute it and have it removed!

If all of this sounds like a "little to much" for you to handle, we can help!

Negotiating older, delinquent debts can save you THOUSANDS OF DOLLARS and improve your credit report and score.  Find out how by clicking the link below!

Just the word BANKRUPTCY sounds terrible! Before you decide if bankruptcy is best for you, here are 3 ways to avoid bankruptcy:

One of the most popular financial-advice gurus today is Dave Ramsey.  He has stated that BANKRUPTCY is one of the top five life-altering negative events a person can experience:

• Divorce
• Severe illness
• Disability
• Death of a loved one
• Bankruptcy

I'm not sure I totally agree, but most people will do whatever it takes to avoid bankruptcy. Bankruptcy basically means that you have taken on too much debt and cannot repay.

I have counseled hundreds of people in financial trouble for many years and it has been my experience that most people who are in serious financial debt got that way from circumstances beyond their control, such as:

• Loss of employment
• Illness or disability
• Death of a spouse or life partner
• Too little income after retirement

Here are 3 Ways To Avoid Bankruptcy

#1 Figure out where your money is going

The first thing you should do to avoid bankruptcy is to take time to complete a Budget or Financial Worksheet.  It sounds so simple, but most people I counsel have no idea what they are spending each month. All they know, is there is not enough money to pay for everything.

You have to know exactly where you stand, financially.  How much money is coming in and how much is going out each month.

I know it's very, very tight, but ask yourself if there are areas of your life or expenses that you could reduce or eliminate, such as:

• Do you have a large car payment? Maybe you could downsize or refinance to reduce your monthly payment.
• How about all those lunches, coffee, lattes?  Can you cut down to a couple times a week instead of every day?  Think of it as a special treat, not a necessity.
• Maybe now is a good time to quit smoking!  I know it's easier said than done, but at well over $100-$150 month it would be good for your budget and your health.
• Do you have to have that health club membership?  Could you work out at home instead to save $35-40$?

Have I made my point? You may be able to find a few hundred dollars each month that could possibly save you from bankruptcy!

#2 Consider enrolling in a Debt Management Program

If cutting your budget won't work, or you have already cut it as far as you can, then perhaps DEBT MANAGMENT (formerly called Credit Counseling or Debt Consolidation) may help.  Debt Management is a program whereby you can arrange repayment of your unsecured debts like:

• Credit Cards
• Store Cards
• Personal Loans
• Private Student Loans
• Medical Bills

You will have ONE MONTHLY PAYMENT which is divided and sent to each of your creditors per the agreement arranged with them by a DEBT MANAGEMENT COMPANY. The program is usually designed to repay 100% of your debt over 3-5 years.

The problem is that you may not be able to afford the monthly payment which is usually about 2.5%-2.7% of your total unsecured debt. Do a quick calculation to see if that fits into the budget you created in step 1.

Sometimes, the debt management payment may be higher that the very low (almost impossible ever to repay in your lifetime) minimum monthly payments that credit cards require! If you cannot qualify for Debt Management, then your next option is:

#3 Settle Your Debts for Less with a Debt Settlement Program

In a DEBT SETTLEMENT PROGRAM, negotiations are made with each of your creditors to accept much less (often 50% or less) of the balance.  You will be making a monthly contribution to a FDIC Reserve Bank Account where your funds accumulate for settlement offers.

Depending on several factors, you may able to not only GET OUT OF DEBT in 24-48 months or less, and you will avoid BANKRUPTCY.

Although you can negotiate with creditors on your own, it is not easy! We have been helping clients negotiate and settle debts for over 10 years.  Is DEBT SETTLEMENT FOR YOU? Find out today!

If cutting expenses, debt management or debt settlement will not help, then you should consult a qualified bankruptcy attorney. Bankruptcy is a way for you to get a fresh start and is not nearly as tramatic as you may think!

Your getting calls from a debt collector, but you do not believe you owe the debt. 

Learn how to stop debt collectors with debt validation.

First, you need to understand a little about debt collection and the process a creditor may use (and many time abuses) to collect that debt.

You have a credit card with a balance of $5000, but you have been unable to pay the minimum payments because you lost your job or have some other financial hardship.

• The creditor  sends your account to their internal collections or recovery department.
• You start getting calls and letters trying to get you to pay up!
• If they are unsuccessful, they will most likely “assign” or “sell” the debt to a collection agency.
• Now the collection agency starts to call and call and call (HOW TO STOP COLLECTION CALLS) and send letters demanding immediate payment.

Since you know that you owe the debt, this is not the time to use DEBT VALIDATION in order to stop the collection efforts.

You only have a few options at this point:

• Agree to a repayment program (HARDSHIP PLAN)
• Enroll in a Debt Management Program (used to be referred to as Credit Counseling)
• Enroll in a Debt Settlement Program
• Seek Bankruptcy Protection

But, for the purpose of this article, let’s say that you believe one or more of the following:

• Do not believe that you owe the debt the debt collector claims.
• Believe the statue of limitations has run out on this debt
• Not sure if you owe the debt and want to make sure it is valid
• Think you paid this debt off a long time ago and don’t owe anything now
• Ran a credit report and saw this debt listed and you think it should not be as you paid it in a settlement.

Here’s what you can do to Validate your Debt:

The Fair Debt Collection Practices Act (FDCPA) gives us the legal authority to request a validation of a debt claimed by a collection agency.

Send a certified letter (so you have proof of receipt) demanding validation of the debt to the collection agency within in 30 days of receiving the letter from the collector.

Sample Letter:

Reference your name, address, etc. and the name of the collection agency, address, etc. at the top.

Reference your account and account number.  If the collection agency has assigned as special account number, reference that as well.

To whom it may concern:

I received a letter dated (date on the letter) from you demanding payment of the above debt.

I do not believe I owe this debt and pursuant to the Fair Debt Collection Practice Act, 15 USC 169g Sec. 809 (b), I am requesting a validation of this debt.

Please provide the following:

• Produce copies of any papers that show that I agreed to pay what you say I owe as well as a copy of my signature and date on those documents.

•  Provide a verification or copy of any judgment if this applies to this alleged debt.

•  Provide proof that your agency is registered in my state.

If you can provide the above documentation, I will need at least 30 days to determine if this information is correct and again, according to the FDCPA, all collection activity must cease.

Looking forward to clearing this matter,

Your signature

Print your name

Date

There are several other demands that can be made, but at this time, your goal is to verify the debt.  If you do not get a receipt of delivery of your registered letter, call the collection agency to verify the address and send again.

• It will most likely take the collection agency 30 days or so to get back to you.

• If they do not get back to you, then this most likely will be the end of it.

• You should wait a couple of months and then check your credit report to see if this debt is listed (or still listed).

If the calls and letters have stopped and it is still listed, you can request the credit bureaus to remove the listing by providing copies of your letters, no response, etc.

I’ll write more about the debt validation process and more options in later blogs, but in the meantime, if you need help, let us know.  (1-877-492-4109)

If you have received wage garnishment due to a judgment issued on your unpaid credit cards or other personal loans, it may be possible to stop it.

But, you need to know your rights.

Certain types of income are exempt from wage garnishment:

• Social Securtiy
• SSS or Supplemental Security Income
• Veteran's benefits
• Civil Service and Federal Retirment and Disability Benefits
• Military Annuities and Survivor's benefits
• Merchant Seamen Wages
• Longshoremen's and Harbor Worker's Death and Disablity benefits
• Compensation for Injury, Death, or Detention of Employees of U.S. Contactors outside the U.S.
• FEMA (Federal Emergency Management Agency) benefits

Also exempt from wage garnishment:

• Retirement income (pension and personal retirement plans)
• Public Employee Retirement System (PERS) benefits
• Income you may be receiving from a Reverse Mortgage
• W-2 Income that is less than $936 net after tax per month( your state's exempt amount )

But, you also need to be aware that these incomes MAY NOT BE PROTECTED from:

• Delinquent Federal and/or State taxes
• Federal Student Loans
• Child Support
• Alimony

If you receive a notice of garnishment, you should immediately contact the attorney representing the plantiff (creditor).

Your employer cannot do anything for you.  In fact, your employer must fulfill the writ of garnishment or could be subject to a hefty fine!

In most cases, the attorney for the plaintiff will agree to a reasonable repayment plan instead of enforcing the garnishment.

But I said REASONABLE!

If the garnisment is going to be 25% of your net income (most states), and that comes to $500 per month, they are not going to agree to a $100 a month!

But, they may be open to say, $250-$350 for a STIPULATED AGREEMENT (SA).

You may also be able to settle the amount you owe for less than the full balance.  If you have any funds available, make an offer of approximately 50% fo the balance.

Since the judgment has been entered, and the writ of garnishment has been presented to your employer, the creditor will not be as willing to discount the balance as in a normal DEBT SETTLEMENT AGREEMENT.

If this sounds like too much for you to deal with us, please contact us.

If you have a 2nd Mortgage and are able to complete a short sale, you will probably be responsible for the deficiency balance on the 2^nd mortgage.  The good news is, you may be able to negotiate the deficiency balance and eliminate that outstanding debt for much less.

Before I begin, let’s take a look at the benefits of both a Short Sale and a Foreclosure to help you decide if a Short Sale makes sense for you and your family.

Benefits of a Short Sale

• You are in control of the sale.
• You may sleep better at night knowing who is buying your home.
• Your home sale will be handled like any other home sale.
• You will be eligible, under Fannie Mae Guidelines, to buy another home in 2 years instead of 5 years.
• If your credit report does not reflect a 60 day late pay, under Fanny Mae guidelines, you will be eligible to buy another home immediately.

Benefits of a Foreclosure

• There are no mortgage payments to make while you are waiting for the foreclosure to be completed.
• The home is yours until the foreclosure is final.
• There will be no strangers touring your home.
• Some banks offer "cash for keys" after a foreclosure sale.

After researching your options, you decide to move forward with a Short Sale in an attempt to avoid foreclosure.  It’s important that you understand, in most short sales, the first mortgage holder, is the primary beneficiary of the short sale.  This means that most short sales compensate the primary or first mortgage holder and the second mortgage holder usually agrees to accept a very small amount or percentage to RELEASE the equity interest in the home.

In other words, the second holder agrees to have the remaining balance (after the small amount paid for releasing the equity interest) become an UNSECURED LOAN now.

And, in most cases, you are still responsible for this balance!  The good news is, you can usually negotiate a second mortgage balance after a short sale.

Here are 3 tips on how to negotiate a second mortgage after a short sale

#1 Get Prepared

Before you attempt to negotiate the debt with your 2^nd mortgage servicer, you need to know where you stand financially.  It would be a good idea to complete a simple BASIC BUDGET that lists all of your assets and liabilities.

This will show the second mortgage holder where you stand and what you possibly could or could not do to settle the remaining balance.

#2 Don’t Ignore your 2^nd Mortgage Holder

Most of the time, your 2^nd  mortgage company will try to contact you right away.  Don't just ignore their calls or letters as this will leave them no choice but to file a claim with the intent of getting a judgment against you for the remaining balance.

If they do file a claim, you will receive a SUMMONS and your chances of getting a good settlement go down!

Be proactive!  If they haven’t contacted you, then you need to call them to get the communication going.

#3 Start Negotiating

Although the negotiation process can be long and in some cases, very stressful, most second mortgage holders will accept a settlement for less than the amount you owe. How much less?

That depends on many factors.  Your 2^nd mortgage servicer will want to know:

• What are your financial assets? (usually there are no assets or you wouldn't have had to do the short sale in the first place)
• Are you employed?
• Are you receiving retirement income?
• Are you receiving unemployment income?

All of these things are taken into consideration when working out a settlement with you.  Because you have already worked out your budget, you know where you stand.  Stick to a settlement with payments you can afford. There is no point in negotiating a settlement that you default on in the first month. 

Don’t forget to GET THE SETTLEMENT AGREEMENT IN WRITING!  Do not rely on phone conversations or just emails. If you don’t, they can come back for the full amount even after you’ve paid the agreed settlement. 

If all of this seems like just TOO MUCH, click here & let us help!

These days, more than ever, consumers are worried about their credit history and seeking credit help. It’s no wonder with up to 70% of credit reports containing very serious errors.

A bad credit history doesn't have to be a life sentence. If you educate yourself in how the credit reporting system works, you can work to remove issues caused by a divorce, bankruptcy, collection account or judgment. Bad or good credit has one thing in common. It must be verifiable. Fortunately for us, credit inaccuracies can be removed.

DIY credit repair is possible if you follow these 5 simple steps:

1. Get a complete copy of your credit report.

There are three national credit bureaus:  Experian, Equifax and TransUnion. You can get a completely free copy of your credit report once per year from www.annualcreditreport.com. Once you have your credit reports, go over each one with a fine tooth comb. Scour the reports for errors such as inaccurate account information, incorrect home addresses, duplicate accounts and false information. Many times you will find small errors like credit limit, balance, date opened/closed and payment history and fixing those errors can make a huge difference on how your credit looks.

2.  Dispute the errors.

Once you determine the errors, highlight each one and attach a credit repair letter and a copy of the credit report explaining the nature of your dispute. Send off the letter and a copy of the report to the corresponding credit bureau. Wait about 30 days to get a response from the credit bureau reflecting the correction and continue this process until you have cleaned up all inaccurate, false or outdated or unverifiable information. Credit bureaus can only report a negative credit history for 7 years from first serious delinquency or charge off so be careful to look for outdated information.

Equifax
(equifax.com)
PO Box 740241
Atlanta, GA 30374-0241
(800) 685-1111

TransUnion
(transunion.com)
760 W. Sproul Rd.
Springfield, PA 19064-0390
(800) 888-4213

Experian
(experian.com)
PO Box 2104
Allen, TX 75013-0949
(888) 397-3742

Keep a paper trail of everything! Your proof of all your hard work will be in your documentation so be sure to keep copies of everything. Send your credit repair disputes by certified mail so that you get a receipt back showing the dispute was delivered to the credit bureau. Credit bureaus receive millions of pieces of mail so don't think your dispute won't get lost in the shuffle. You may need all that documentation later if you find the bureau being resistant.

3. Go directly to the source

Sometimes you may find that the credit bureau has determined your information to be timely and accurate. You may feel differently about it and may even have a good argument. That is when it is time to turn your attention to the creditor who is reporting it. The creditor holds all the power in how they report your accounts and ultimately they are the one who can remove a negative mark.

Some strategies to dealing with the creditor is to provide them with a written history of what you believe happened. Maybe they charged a late fee inappropriately or maybe they agreed to re-age a late payment but did not follow through or possibly you had an agreement with them to remove a negative mark in exchange for settling a debt. Follow the same strategy as above getting everything in writing and keeping good records of exactly who you spoke to and where you mailed your credit repair letters.

4.  Validate the remaining debt

Use your rights under the Fair Debt Collection Practices Act to question the validity of the debt. If they cannot prove it- they cannot collect or report it- simple as that! Do not forget to check the Statute of Limitations - you may not even have to pay it.

5.  Negotiate the debts that you owe

Once you have completed all the steps above you will probably be left with a few accounts that you do need to pay off such as outstanding credit card debt and collections that you legitimately owe.  By dealing with the collection agency in writing you can begin to negotiate a reduced payoff in exchange for a better rating or a deletion of the negative account. This can be very effective in wiping out negative credit. A collection agency is more interested in getting your money than reporting the debt. They only report it as a tool to get you to contact them because they know eventually that bad mark will be in your way of getting a car, home loan or job.

As always, Keep Everything! Get everything in writing especially settlement offers. If you don't they may cash your check and leave the nasty mark on your credit. Move onto someone else within the agency if the person you are dealing with is impossible. Ask for a superior. Never let the debt collector know that you are paying off the bill because you are trying to get a loan. They will have you right where they want you if you do.

A client called us the other day and asked, "Do you have to pay tax after settlement?"

In most cases, the answer is NO.

When you negotiate a settlement on a debt you owe, let's say a credit card with a $10,000 balance is settled for $4,000 (yes it is very possible!), the amount that is FORGIVEN may be added back into your taxable income for that year.

At the end of the year, you will receive a 1099-C in the mail that states that the creditor has reported the $6000 of forgiven debt to the IRS (any amount forgiven over $600 may be subject to IRS reporting).

What do you do when you receive a 1099-C?

First, if your accountant or tax preparer tells you that you will have to pay tax on that amount, you probably need to find a new accountant!

Why?  It has been my experience that most accountants and tax preparers are not aware or experienced in how to treat 1099-C for settlements or forgiveness.

IRS Form 4681 explains that certain amounts of "forgiven debt" may be excluded from taxable income.  Basically, if AT THE TIME OF FORGIVENESS, you were INSOLVENT (your debts were greater than your assets), then the forgiven amount IS NOT included as taxable income.

List all of your assets:

• Any equity you have in your home
• Net or depreciated value of your cars, boat, etc.
• Net value of your jewelery, stocks, bonds, etc.
• Cash

Now list all of your debts:

• Mortgage (First and Second) on your home
• Lines of credit
• student loans
• credit cards
• medical bills
• personal loans

Subtract the DEBTS YOU OWE from your ASSETS.  If the number is negative, then you are "insolvent" according to the IRS. Complete IRS Form 982 and check the appropriate boxes to show that this amount should be excluded.

The moral of this story, don't think that just because your accountant or anyone else tells you that you must automatically pay tax after settlement, that it is always true.

photo by: Alan Cleaver