How Do or Can I Settle My Debts on My Own? – Shawna

I agree with almost everything Steven says on this with one minor exception. Debtor forgiveness received at a time when is debtor is legally insolvent is not taxable. You will receive a 1099 from each creditor and will need to file form 982 with your taxes to show that the the debt forgiveness income is not taxable. You would need to have a CPA review your situation to see if qualify to claim insolvency on your taxes.

Your situation is fairly typical and makes me really wonder why people try so hard to avoid bankruptcy. By the time you settle, your credit will already be hosed AND you will ow mom a nice chunk of change. Sure, you might get them to settle for 50% or less of what you oh, but so what? You are still indebted to your mom for a sum that isn’t exactly very small.

Instead, why don’t you just borrow $2000-$2500 and go hire a good bankruptcy attorney? Your credit probably can’t get much worse than it already will get and most of my clients see an improvement in their credit score within a year after receiving their discharge.
Carl H. Starrett II´s last blog ..Getting What You Need From Bankruptcy

[Reply to This Comment]

Steve Rhode Reply:
August 13th, 2009 at 1:19 pm

Carl,

I think I might have finally got one over on you. You are right about the insolvent thing BUT the IRS says that if the forgiven debt makes you solvent then you owe tax on the amount over your break even point. So if someone is primarily in debt because of credit cards and that is what is making them insolvent, guess what, forgiven debt leaves you solvent and a new friend of the IRS. :-)

(Bet you didn’t know that one.)

Steve

[Reply to This Comment]

Well, I actually did know that but I’m not a tax attorney and didn’t want to express an opinion on whether Shawna was legally insolvent.

Insolvency is basically when you total debts exceed your total assets. If someone has $10,000 in assets and $20,000, a a creditor forgiving $10,000 is not a taxable event. That same person receiving $15,000 would have $5000 in taxable income.

Debt forgiveness achieved in bankruptcy is never taxable, yet another advantage of bankruptcy over debt settlement.
Carl H. Starrett II´s last blog ..Getting What You Need From Bankruptcy

[Reply to This Comment]

Steve Rhode Reply:
August 13th, 2009 at 1:48 pm

Carl,

Damn, thought I had you.

Steve

[Reply to This Comment]

Two quick points. First, when you compare debt settlement versus bankruptcy, one big difference is that there’s no automatic stay while doing debt settlement. Simply, the automatic stay is the protection from the Court against all of the creditors. When you file bankruptcy, you have no more nagging phone calls from creditors, and no worries about being sued. Conversely, when you’re going through debt settlement, the phone continues to ring incessantly until all the debts are settled, and you might be sued.

Second, when you’re in debt settlement mode, and your debts have “charged off”, i.e., been assigned to third-party debt collection companies, then you probably will not be issued a 1099-C either. Since they aren’t the original creditor, they’re not entitled to issue a 1099-C.

Good point though, Carl, about the Form 982. Debt settlement though sure does create a lot more worry though than filing a Chapter 7 bankruptcy case.
Shawn N. Wright´s last blog ..How Long Will My Chapter 7 Bankruptcy Case Take?

[Reply to This Comment]