Legal aspects of debt settlement
Can debt settlement stop creditor lawsuits the way a bankruptcy filing can?
No. Sometimes, though, if you settle with a creditor, this is the way to get them to drop the lawsuit against you. I negotiated a settlement with a creditor for less than I owed.
The creditor is now suing me for the balance. Is this legal?
Yes! You need to read the following information carefully.
Some collection agencies will agree to settle with you for far less than you owe and then turn around and hire another collection agency to collect the difference. However, in many states this is illegal. Once a creditor deposits or cashes a full payment check, even if she strikes out the words payment in full or writes "I don't agree" on the check, she can't come after you for the balance. The states in which this law is enforced:
Arkansas
Colorado
Connecticut
Georgia
Kansas
Louisiana
Maine
Michigan
Nebraska
New Jersey
North Carolina
Oregon
Pennsylvania
Texas
Utah
Vermont
Virginia
Washington
Wyoming
Some states have modified this rule. In the following states, if a creditor cashes a full payment check and explicitly retains his right to sue you by writing "under protest or without prejudice" with his endorsement, then he can come after you for the balance. But those exact words must be used. If he writes, "Without recourse”, communicates with you separately, notifies you verbally or writes on the check that it is partial payment, it is not enough.
Alabama
Delaware
Massachusetts
Minnesota
Missouri
New Hampshire
New York
Ohio
Rhode Island
South Carolina
South Dakota
West Virginia
Wisconsin
Californians get a special break on full payment laws due to a legal loophole.
California lets creditors cross out the full payment language and sue you for the balance. However, when they passed this law, they also passed a separate law allowing California debtors to get around it. (Don't ask me why). Getting around this law requires specific steps and language. To use it, this procedure must be followed exactly.
1. Send a letter to the creditor stating that you intend to send a full payment check. A
sample letter may be found in Appendix A “California Resident Full Payment Letter”.
2. Wait 15-90 days to give the creditor time to object
3. Send the check with a letter stating that the check constitutes payment in full. . A sample letter may be found in Appendix A “California Resident Full Payment Letter with Check”.
4. Important: Write on the bottom of the check on the front along the top or bottom the exact language you used in the second letter "This check is tendered in accordance with letter of _______ (date). If you cash this check you agree that my debt is paid in
full."
Tax Consequences of Debt Settlement
So you’ve been successful at settling your debts with a creditor, and you think the nightmare is over. Well, not quite. Most people don’t know this, but the IRS regards debt forgiveness (paying less than you owe on a debt) as income.
If you are dealing with the original creditor, and you work out a settlement for less than you owe, the creditor may send you a 1099-C at the end of the tax year. You are required to report the amount listed on the 1099-C as income.
So how bad is this? Well, it depends on your tax bracket. Income tax is beyond the scope of this book, but briefly, your tax bracket depends on how much income you report, after deductions to the IRS.
Just as an example, and we are not using real numbers here, let’s say:
1. If you are below the poverty line, you don’t pay any taxes.
2. If you make over $35,000 you pay 20% taxes
3. If you make over $50,000, you pay 35% taxes
4. If you make over $70,000 you pay 39% taxes
Let’s also say that you get a $5000 break in your debt settlement. The creditor sends you a 1099-C for $5000 at the end of the year.
You would pay:
1. no extra taxes if your income is below the poverty line
2. $1000 in additional taxes if you are in the 20% bracket (hey, you are still saving $4000 overall by negotiating)
3. $1750 in additional taxes if you are in the 35% bracket
4. $1950 in additional taxes if you are in the 39% bracket
This is something you should definitely consider when negotiating a debt.
The above content is for FYI only, the numbers and figures would have changed
******Usman ahmed owner of this blog created this post with his knowledge.All content provided on this blog is not copied from any other blog and site and is for informational purposes only and The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.
Can debt settlement stop creditor lawsuits the way a bankruptcy filing can?
No. Sometimes, though, if you settle with a creditor, this is the way to get them to drop the lawsuit against you. I negotiated a settlement with a creditor for less than I owed.
The creditor is now suing me for the balance. Is this legal?
Yes! You need to read the following information carefully.
Some collection agencies will agree to settle with you for far less than you owe and then turn around and hire another collection agency to collect the difference. However, in many states this is illegal. Once a creditor deposits or cashes a full payment check, even if she strikes out the words payment in full or writes "I don't agree" on the check, she can't come after you for the balance. The states in which this law is enforced:
Arkansas
Colorado
Connecticut
Georgia
Kansas
Louisiana
Maine
Michigan
Nebraska
New Jersey
North Carolina
Oregon
Pennsylvania
Texas
Utah
Vermont
Virginia
Washington
Wyoming
Some states have modified this rule. In the following states, if a creditor cashes a full payment check and explicitly retains his right to sue you by writing "under protest or without prejudice" with his endorsement, then he can come after you for the balance. But those exact words must be used. If he writes, "Without recourse”, communicates with you separately, notifies you verbally or writes on the check that it is partial payment, it is not enough.
Alabama
Delaware
Massachusetts
Minnesota
Missouri
New Hampshire
New York
Ohio
Rhode Island
South Carolina
South Dakota
West Virginia
Wisconsin
Californians get a special break on full payment laws due to a legal loophole.
California lets creditors cross out the full payment language and sue you for the balance. However, when they passed this law, they also passed a separate law allowing California debtors to get around it. (Don't ask me why). Getting around this law requires specific steps and language. To use it, this procedure must be followed exactly.
1. Send a letter to the creditor stating that you intend to send a full payment check. A
sample letter may be found in Appendix A “California Resident Full Payment Letter”.
2. Wait 15-90 days to give the creditor time to object
3. Send the check with a letter stating that the check constitutes payment in full. . A sample letter may be found in Appendix A “California Resident Full Payment Letter with Check”.
4. Important: Write on the bottom of the check on the front along the top or bottom the exact language you used in the second letter "This check is tendered in accordance with letter of _______ (date). If you cash this check you agree that my debt is paid in
full."
Tax Consequences of Debt Settlement
So you’ve been successful at settling your debts with a creditor, and you think the nightmare is over. Well, not quite. Most people don’t know this, but the IRS regards debt forgiveness (paying less than you owe on a debt) as income.
If you are dealing with the original creditor, and you work out a settlement for less than you owe, the creditor may send you a 1099-C at the end of the tax year. You are required to report the amount listed on the 1099-C as income.
So how bad is this? Well, it depends on your tax bracket. Income tax is beyond the scope of this book, but briefly, your tax bracket depends on how much income you report, after deductions to the IRS.
Just as an example, and we are not using real numbers here, let’s say:
1. If you are below the poverty line, you don’t pay any taxes.
2. If you make over $35,000 you pay 20% taxes
3. If you make over $50,000, you pay 35% taxes
4. If you make over $70,000 you pay 39% taxes
Let’s also say that you get a $5000 break in your debt settlement. The creditor sends you a 1099-C for $5000 at the end of the year.
You would pay:
1. no extra taxes if your income is below the poverty line
2. $1000 in additional taxes if you are in the 20% bracket (hey, you are still saving $4000 overall by negotiating)
3. $1750 in additional taxes if you are in the 35% bracket
4. $1950 in additional taxes if you are in the 39% bracket
This is something you should definitely consider when negotiating a debt.
The above content is for FYI only, the numbers and figures would have changed
For The User
******Usman ahmed owner of this blog created this post with his knowledge.All content provided on this blog is not copied from any other blog and site and is for informational purposes only and The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site.The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information.
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