I recently found out that my wife has quite a bit of debt. We’ve only been married since October and she plucked up the courage to finally admit it a couple of weeks ago. The amount of debt was just over $50,000. As you can imagine, I was a little shocked but nothing I could do but start to tackle it. She had a $12,000 AMEX bill, which I paid a settlement amount for. In addition she had a $11,000 loan, which I also paid a settlement amount for and some other store cards. So far I have settled everything except $11,200 to the IRS for back taxes and around $10,000 for medical bills. I’ve already tackled a big chunk of it and have set up a monthly payment of $215 to the IRS to cover the IRS debt. I have about $4,000 left that I can spend without it affecting us too much.
My question is whether it would be better to send the IRS that $4,000, which would lower our burden to them and possibly lower our monthly payments. Alternatively, should I see what the medical bill companies would settle for and put it towards that? I’m trying to avoid getting too many monthly payments and it becoming a nightmare as there are about 10 different medical bills totally $10,000. Would consolidation of the IRS debt or consolidation of the medical debt be an option? Or consolidate both into one debt? I need some help and advice. Please let me know your thoughts as to the best course of action. We’ve just started a family and I want to get this behind us. Many thanks.
I’m going to have to answer this in two different ways. First, for those people reading this that may have found themselves in a similar situation my advice would be for the new wife to accept responsibility for her past actions and go bankrupt by herself. This would discharge all but the IRS debt and preserve the new husbands cash in cash of a real emergency.
Paul I don’t want to make you feel bad but you’ve taken just about the worst possible path on this that you could have. Of all the debts the IRS debt should have been paid first. But on the rest of the debts, which I am assuming takes care of your wife’s debt, your paying off her debt leaves with with a huge tax problem that guess what, you’ll get to pay on your new married tax return this year.
Because she settled the debt and is no longer insolvent she will have to pay income tax on all the forgiven debt but since you’ve drained your cash, will you be able to pay that? Plus the settled debt still shows up on her credit report as a bad debt for the next seven years so what have you really accomplished here?
If the $4,000 is all the cash you have left, you need to save that in an emergency fund and not spend it. You need to have access to an emergency fund to protect you in case of an emergency so unexpected expenses don’t wind up on credit.
The only thing that could possibly make this situation worse would be if you borrowed or took the money you used to settle this debt from a retirement fund.
I’m sorry to say Paul but this is the best example of what not to do.
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