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I Just Found Out My Wife Has $50,000 in Debt So I Settled It. – Paul

“Dear Steve,

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.

Paul”

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The Answer

Dear Paul,

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.

Big Hug!

I Just Found Out My Wife Has $50,000 in Debt So I Settled It.   Paul
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Paul F

    Ha ha, for what reason do you presume I took it out of my retirement? I’m 28 years old. My retirement fund hasn’t reached that level yet and I don’t have access to my trust fund until I’m 30. However, it’s amusing that you presume that. The $30,000 I’ve paid off so far came from my checking.

    • http://GetOutOfDebt.org Steve Rhode

      Paul,

      Most people make the mistake of borrowing funds from retirement funds to do this. I was hoping you had not.

      How much do you have left as an emergency fund?

      Steve

      • derek

        cash is king

  • Paul F

    That’s actually not strictly true. After speaking to a tax professional and the IRS, the most important thing is that she was insolvent at the time of settlement and is still insolvent with regards to the IRS debt and medical debt vs. her assets. On her tax return she just has to show her insolvency at the time. Also, her credit was shot to pieces anyway so having bad credit for 7 years does not outweigh the thousands of dollars she saved by settling. Even if she does end up paying some tax on the settlement differences, it’s still way less than what she would have had to pay.

    • http://GetOutOfDebt.org Steve Rhode

      She would have had to pay nothing with bankruptcy.

      Steve

      • Paul F

        Well at least you admit you were incorrect about your insolvency comment. You showed that by your lazy reply to my last comment. I find it astonishing that you decided to reply to my question in the manner you did. Instead of offering advice you chose to berate the situation and use it as an example. However, your answer was quite flawed. You were incorrect about the possible income tax due to settlement amount differences and her solvency status.

        You were also incorrect about settlements being a bad thing with regards to 7 years of bad credit. Chapter 7 Bankruptcy stays on your credit report for 10 years. Chapter 13 Bankruptcy stays on your credit report for seven years. However, Bankruptcy hangs with you for life. Loan applications and many job applications ask if you have ever filed for bankruptcy. And if you lie, you’re technically committing fraud.

        It surprises me that you suggest bankruptcy immediately. People should take responsibility for their mistakes and filing bankruptcy is the easy and lazy way out. It’s there for a reason and should be a viable option in the right situation. However, if we can afford to pay it off without filing bankruptcy, then what gives us the right to ask for a free ride by her declaring bankruptcy? Too many people use that as an easy way out.

        Perhaps you should rethink your approach to people seeking advice from you. Instead of just suggesting bankruptcy and deciding to berate someone’s situation, maybe you should actually offer some insight and advice based on research and correct information. I can imagine a lot of people that contact you are looking for some guidance and if I had actually taken your reply seriously, I would have most likely been made to feel like a failure. Aren’t you suppose to be offering advice in a time where a lot of people are worried about debt? Perhaps give them a game plan to make the best of their situation?

        No, of course not. That would be far too logical. Why don’t you just mock the situation and tell the person seeking help that they have handled things in the worst possible way they could have. Even better, let it be an example to others that you are singling this person out as being an idiot. Oh that’s right you did do that and with so many incorrect statements. How exactly is that advice?

      • http://GetOutOfDebt.org Steve Rhode

        Paul,

        Based on the information you provided I did make the assumption that once you had settled all of her debt she would no longer be insolvent. But if you search this site you will find many discussions about the intricacies of the insolvency issue when settling debt. But that’s not the real issue here.

        The real issue is that in a perfect world your new wife would have dealt with her debt she created before bringing it into the marriage. But once she did, again, in a perfect world, she would have dealt with it without draining your assets which are better served to provide financial protection in your new life together.

        You say “people should take responsibility for their mistakes and filing bankruptcy is the easy and lazy way out” but your wife didn’t accept responsibility, from what you wrote it sounds like you did with your money. And if you want to make the accept responsibility argument fly then one response could be that not honoring the contractual obligations in full and only paying back a part is not accepting responsibility and it’s taking an easy way out as well.

        You say I should offer insight. I did. Based on my years of experience, the highest priority debt, the IRS debt, should have been paid first and the debtor should have accepted responsibility for the debt they created and without any reasonable way out of debt or expectation to repay, should have sought legal protection under bankruptcy other than draining the assets of another to deal with the debt. I understand you are upset with my answer, but I disagree with the path you took and I don’t want others to make, what I feel, is the same mistake. It’s hard for me to sugar coat the situation and leave it as a record for others to read and potentially follow without me saying, don’t do it this way.

        I’m actually not incorrect about settlements being bad regarding credit. And yes it is true that with bankruptcy you do have to disclose if you have been bankrupt on future credit applications if you are asked, but so what? Credit is easy to rebuild after bankruptcy and the sole fact of having been bankrupt does not prevent you from getting future credit. The charge offs and partial payments and settlements can show up for life when applying for: credit transactions involving more than $150,000 or more, underwriting of life insurance with a face value of $150,000 or more, and employment for a job with a salary more than $75,000 or more. The timelines don’t apply in those situations.

        Q: “Aren’t you suppose to be offering advice in a time where a lot of people are worried about debt?”
        A: I do.

        Q: “Perhaps give them a game plan to make the best of their situation?”
        A: I did. The game plan I gave you was, “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.”

        Paul, did you have the cash on hand to settle? My fear is that you might have borrowed it from a retirement plan.

        Steve

      • http://GetOutOfDebt.org Steve Rhode

        Paul,

        I forgot to address your statement “Well at least you admit you were incorrect about your insolvency comment. You showed that by your lazy reply to my last comment.”

        The reason for my short response was because I was out to dinner and saw your comment come in and wanted to respond as quickly as possible but typing a lot on a cell phone is a pain.

        Steve

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