Debt Settlement; a Success Story

[lostindebtinVT]

In December of last year I stopped making my credit card payments and I had $133,000 in credit card debt that was growing monthly at 29.99% interest with late fees and overlimit fees. I was more than panicked with many sleepless nights and the phone ringing off the wall.

I'm happy to say that with the right planning; I borrowed from my 401k, received money from family, cut back on my expenses and sold personal possessions - I was able to come up with enough money to settle my accounts. I had the following results:

BOA - 38% at 90 days delinquent

Chase - 45% at 120 days delinquent

Citi - 38% at about 100 days delinquent (they called me)

Discover - 50% at 170 days delinquent (the hardest one to settle)

Sears - 0% financing for 5 years at 120 days delinquent.

I now only owe $6,000 in credit card debt with Sears and resolved my credit card situation in about 7 months. I still have some tax implications to deal with, but I'm trying to sell my home so I can take care of that. If I do not sell by filing next April, I will just have to work something out with the IRS. I am insolvent for about $45,000 of the savings so my tax implications should be around $12,000 - I receive a refund generally of $5,000-$6,000 so that means I'll have $6,000-$7,000 left to pay them; the IRS will take a installment plan at 8% interest if you work it out with them and I could do that until I filed a few more years. They can have my refunds, to me it beats paying those credit cards who were at $4,000 a month by the time they were done with me.

So with all that said; I'm hoping to have my house sold and the IRS paid in the next year. I have another smaller home I am moving to that is less expensive that has been rented. The tenant is moving on August 31st so I will move to that house before winter in September because I have a wood pellet stove there and it will be much cheaper to heat. If I don't sell this house here, I will rent it for the winter (no one moves in the winter).

So I have some breathing room if I can keep the car running (it's 8 years old) and I can get the house rented or sold. Hopefully, the housing market will turn around some more so I can make more money and get back on my feet. I think that is more likely to occur next year so I'm planning on a rough winter.

I did my own negotiating with the creditors and found that if you treat them wth respect; most of them treat you with respect. I talked to some very caring people that could relate to my situation.

I guess I would say from my experience, to anyone thinking of doing debt settlement, is to sit down and figure out what you owe and figure 50% of that amount is what you will need settle your accounts. I was fortunate because I saw it coming and was able to borrow before it was too late and that is what made my debt settlement successful. If you wait until it is too late and you have no resources to borrow from or family to help you; you will be less successful.

I think the biggest mistake people make is waiting and trying to keep paying until they are at the end of their rope. If you know you are in trouble, see it coming and still have some assets available by borrowing from your home or 401k or you still have some savings; don't use up all your resources until you have nothing else to tap into; stop the bleeding before it's too late.

www.lostndebt.savingadvice.com

[tice03]

This is a great story and one that I have started as well. Currently I am a little over 60 days deliquent. I started with a little over $45,000 and with fees I will probably be close to $50,000 by the time I settle. Right now I have about $11,000 saved for settlement and will be looking to have 50% ($25,000) somewhere in the 6 to 8 month time period. I have 10 credit cards I am looking to settle with Citi (3), MBNA (3), Discover, Chase, AmEx, and Capital One. One question I have is how did you handle all the collection calls. Did you simply ignore them which is what I have been doing up to this point wtih the plan to start talking with them around the 90 day mark. Or did you answer calls from the beginning and let your intentions known that you wanted to settle. Also how did you handle the settlement process did you start with letters or did you talk directly with your creditors and asked them to send you written settlement offers.

[lostindebtinVT]

After 45 days I started talking to them every two weeks; I had a privacy corp answering machine that screened my calls so the phone would not ring when it was a creditor (I had programmed their numbers in). At 45 days I told them I had no income and my intentions were to try and borrow money from family to settle my debt with them. Some would say they did not settle, but I knew they all would in the end. They all have their policies for settlement and I learned as I went along.

Your first creditor to settle will be MBNA or BOA - they will settle about 35% at 90 days.

[shrinkingvioletssad]

Hi Lost!

It has been quite a while since I've posted on this forum, but you brought me out of retirement. I felt attacked in the past, by someone on this board, but I still come in to read from time to time.

(Actually this is one of the better boards, so many great people post here)

Reason for me clawing myself out of the lurking mode, is to tell you how proud I am of you. You seem like such a hardworking individual who honestly tried their best to be fair to the OC's and work with them, while at the same time... scramble to save yourself.

I am in a position that I am up against a wall, and wish I wouldn't have borrowed from credit card co's to pay off credit card co's.....sigh.

Well, lesson learned....

I just wanted to say thank you for sharing your experience. I needed to read that. I will continue to read your journey to debt free living, as I need the positive endings.

[torikid]

I think this is a wonderful story and wish I had the opportunity to do as you have done. Great job and congradulations! I can just SEE the monkey lifted from your back.

[whocares]

Good job, I bet you feel so much better now.

I would be scared to death to even have 133,000,00 in credit

Good Luck

[piionline]

Wow, Congratulations... I also have been here forever and have not posted anything in a long time.

Currently we are at around 56k in credit card debt that I have really good financing terms on (2% for most of it and 5-6% for the other 19k) with low minimum payments.

We can have this paid off hopefully in 5 years spending about a grand a month, assuming nothing happens... but My wife just quit her job as they offered her a move with a pay-cut deal & a promotion? or quit. She quit.

We are lucky to have enough savings to last about 6-9 months without changing our spending habits, but she is starting a new commission only job selling insurance... so hopefully we won't have to resort to this, but it is nice to see it is possible. Again, thanks!

[Debt Guy]

Congratulations. You had a sound strategy and the funds to make it work on a timely basis. Being able to fund the settlements before charge-off minimizes the negative impact on your credit report and holds down the frustration level.

You did not say, but I presume that someone as organized as yourself received written settlement agreements for all the deals.

You also got good financial results. I've been coaching someone in your same situation. We did a little better on BofA but not quite so good with Citi -- I've learned to not worry so much about the individual deals but to focus on the average. You did just fine.

Good luck to you.

[willingtocope]

I, too, congradulate you for doing it yourself. If, as Debt Guy asks, you got the settlements all in writing, and they're not going to sell the balance to a JDB, you've done well.

However...

I still have some tax implications to deal with, but I'm trying to sell my home so I can take care of that. If I do not sell by filing next April, I will just have to work something out with the IRS. I am insolvent for about $45,000 of the savings so my tax implications should be around $12,000 -

...from the jist of the discussion on one of the other posts about this, it seems to me that the insolvency is in the year in which the 1099c's are issued, not when you settle. If your settlements didn't include 1099c this year, they may sneak up on you later.

[Debt Guy]

..from the jist of the discussion on one of the other posts about this, it seems to me that the insolvency is in the year in which the 1099c's are issued, not when you settle. If your settlements didn't include 1099c this year, they may sneak up on you later.

WTC -- I'm still on the hunt for this answer and keep getting trapped in a circular set of references.

I discovered that when I was not looking, the IRS revised Form 982 and published some expanding instructions. Line 1b is the place to to report "discharge of indebtedness to the extend insolvent (not a Title 11 case [bankruptcy].

The instructions, like always, are written in Klingon. But, there is an example on Page 3 of the instructions that relates to line 1b

"Example: You were released from your obligation to pay your credit card debt in the amount of $5000. The FMV of your total assets immediately before the discharge was $7000 and your liabilities were $10000. You were insolvent to the extent of $3000. Check the box on line 1b and include $3000 on line 2"

Now, my Klingon to English interpretation of that is that the determination is computed the instant before the "discharge" -- in this case discharge not being used in the context of a bankruptcy but the discharge of the debt.

Logically, in the case of a settlement, the discharge and the issuance of the 1099 should be in the same tax year.

But, going back to some of our earlier conversations about the 1099 that shows up from some old debt -- well, I can't find anything in the instructions or Publication 525 (Taxable and Nontaxable Income) of Publication 908 (Bankruptcy Tax Guide) that says anything about the liability being in the year the 1099c was issued. I wish the instructions gave more examples for other situations.

Now, trying to follow the logical impact of that conclusion -- I've changed my mind about how this works.

In the case of a settlement, the discharge was the instant before the settlement. Computation takes place at that time. It is highly likely the 1099c would be issued during that same tax year. Result: minimal confusion.

In the case of a 1099 issued as the result of a regulatory trigger (like the 3-year issue or the determination of SOL expiration), the discharge would be the instant before that "event". Who knows when the 1099c would be issued -- but hopefully in the same tax year as the event. Result: minimal confusion if both in same tax year -- or maximal confusion if event and 1099 in different tax years (which to me would imply the need to amend prior returns).

Is any of this starting to make sense?

I'm going to go ahead and post this at the tail of the most recent 1099 thread so it all stays together and others can comment.

I am not a tax guy and I'm still looking for a definitive answer to this conundrum. Everything I can find says the liability ties to the event and not the issuance date of the 1099c.

Of course, all taxpayers know they are lawfully required to report the income even if they don't get a 1099c. Right?

The OP should obviously report the income even if no 1099c was received.

[willingtocope]

Logically, in the case of a settlement, the discharge and the issuance of the 1099 should be in the same tax year

Yes, I agree. However, if, for whatever reason, the creditor decides that the settlement doesn't constitute the trigger that causes them to issue the 1099c, then all bets are off. For THEIR tax purposes, the OC could decide to carry the charge off on their books for the full 3 years of "non collection activity" and then issue the 1099c.

The confusion, I think, is that the issuer of the 1099c gets to control the event that triggers the debtor's tax liability.

[lostindebtinVT]

I have a friend who settled their debts in 2007, they received 1099's from all the creditors from the date of settlement. According to the IRS you must do a balance sheet the date of settlement on each settlement and hopefully the creditor will date it correctly, with my friend, they did. I asked each creditor when they would send the 1099c and they said at the end of the year they would be issued.

[Debt Guy]

However, if, for whatever reason, the creditor decides that the settlement doesn't constitute the trigger that causes them to issue the 1099c, then all bets are off. For THEIR tax purposes, the OC could decide to carry the charge off on their books for the full 3 years of "non collection activity" and then issue the 1099c.

The settlement itself is a "trigger event". I guess it is always possible that a mistake could occur -- but I would be highly surprised if the creditor settled the account and then continued to carry the debt on their books another 3 years as a conscious decision.

The confusion, I think, is that the issuer of the 1099c gets to control the event that triggers the debtor's tax liability.

I'm not convinced that is true. The taxpayer is obligated to report the income even if they do not receive a 1099.

I have a friend who settled their debts in 2007, they received 1099's from all the creditors from the date of settlement. According to the IRS you must do a balance sheet the date of settlement on each settlement and hopefully the creditor will date it correctly, with my friend, they did. I asked each creditor when they would send the 1099c and they said at the end of the year they would be issued.

That is exactly the way it should work.