Which is Worse, Bankruptcy or a Write Off? – Jenny

Steve Rhode — Sun, 07 Feb 2010 17:08:12 +0000

“Dear Steve,

Bankruptcy or Writeoff? When it comes down to it which is worse? Is a debt write off from a company as bad as a bankruptcy? I have some funds coming soon and I was going to settle with them, but they tell me the debt is about to be written off. My question is do I let it write off and save the cash for paying other debts since my credit is already very bad, or do I settle the debt in hopes that I’ll salvage my credit to some degree?

Jenny”

The Answer:

Dear Jenny,

It’s really an apples and pears situation. A charge off or write off is simply an accounting function. But that doesn’t happen unless an account is seriously delinquent It’s the delinquency that hurts your credit.

And then it’s not really bankruptcy alone that hurts your credit, bankruptcy is a tool or solution applied to address the current financial situation. In fact for people with a number of delinquent debts bankruptcy can actually increase the credit score.

Your concern at this point should not be on what will manipulate your credit score but what will actually resolve the financial problems in the best way.

You mentioned you have some cash on hand to settle the debts. But before you even begin to think about settling this debt or that one you need to look at your overall situation. If settling one debt does not fix your entire situation and you can’t afford to payoff or settle the rest of the debts than you are simply still in debt.

Bankruptcy attorneys do not charge to meet with you to discuss your situation. I’d suggest that you click here to find a local bankruptcy attorney you like and discuss your situation with them. Meeting with a bankruptcy attorney does not mean you are going bankrupt, it means you are educating yourself about what bankruptcy would mean for you.

The way your credit gets better is by resolving the bad debts and then getting back in the credit game and have new good credit reported about you. It’s very easy to rebuild credit once you pay off or close the door on the old bad stuff.

Big Hug!

@GetOutOfDebtGuy

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

Debt Settlements May Be Voided And the Money Due Anyway

Steve Rhode — Thu, 12 Nov 2009 19:39:23 +0000

From How to Get Out of Debt

A recent posting, “An IRS 1099-C Form Does Not Mean Debt is Discharged” caught my eye. It highlights a great potential risk for people that use debt settlement to eliminate their debt. The surprise is that while they think the debt settlement process has discharged their debt, it absolutely might not.

A third circuit bankruptcy case recently decided that Form 1099-C does not establish that debt is discharged. A creditor typically issues a Form 1099-C to a debtor in bankruptcy to show cancellation of debt. The credit union in the case In re Bononi, had sent the Chapter 7 debtor zero-balance account statements and an IRS form 1099-C for “cancellation of debt.” After receipt of the form and the account statements, the debtor received money from the settlement of a personal injury action.

The court found that despite the statements and the 1099-C form, the debtor still had an obligation to pay on the past debt. Additionally, the court found that even if a creditor issues a 1099-C form, the form does not prohibit the creditor from pursuing collection of the old debt. Only a discharge from the Bankruptcy Court has the effect of canceling the debt and removing the debtor’s liability for the debt. In re Bononi, 19 CBN 864. Source

I’m still researching this issue but from what I have found so far, it is in fact, true. When a creditor writes off a debt or settles a debt, unless they agree the debt has been paid in full, satisfied, and no additional amount is due, then the part of the debt written off may be collected at a latter date.

The reason, the write off of the debt is an accounting function and the issuance of the 1099-C to the IRS is for tax purposes. The write off of the debt and issuance of the 1099-C does not erase the underlying obligation.

This is a big deal. With creditors stressed and pressured for income, I can certainly see a creditor selling their written off debts for pennies on the dollar to generate yet more revenue from them. These would be sold to collectors that are prepared to fight the settlement offers. While the part paid in the settlement would be paid, it is the amount forgiven that could be collected.

And for all the critics that say this will never happen, my response is that it just has not happened yet in mass, but it certainly may. It’s a profit center waiting to be exploited and we all know how much banks love profits.

My bet is the most likely consumers to be hit with this will be all the people that are currently working with one of the commercial debt settlement companies that may soon go out of business. See 85% of Debt Settlement Companies May Be Closing Soon and Taking Your Money With Them. These companies will go bankrupt and the supporting documentation for any debt settled will most likely vanish with them.

@GetOutOfDebtGuy

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Which is Worse, Bankruptcy or a Write Off? – Jenny

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