Bouncing back from severe delinquency? Please help with any ideas

[Anonymous]

OP, from a fellow New Yorker, I’ll offer you one ray of light you may not be aware of, and that only applies to us in this state. In NY, we benefit from something called the Purge Law, which in effect gives us a two-year advantage when it comes to credit reporting. Whereas in the rest of the country, negative information stays on credit reports for seven years from the DoFD, here it only stays for five years. A DoFD on a debt of 6/2017 will naturally fall away in 6/2022 rather than 6/2024 everywhere else.

It may be a small upside, but it’s something positive that you can keep in mind, that you’ll be able (with sound practice and responsible management of your accounts) to wash this away quite a bit sooner than you may have realized.

[Anonymous]

RE: ImTheDevil

Thank you! This is music to my ears. Every little bit counts.

[Anonymous]

Update: I called Chase at 8:30AM this morning and verified that Chase owns the debt and ARS is the collection agency. I called ARS and discussed the terms of settling my biggest 2 debts. Next step is the Debt Verification letter, which is being sent to me overnight (but they said it will actually take 2-3 business days).

Notes:

-I was not able to negotiate with them to write "Paid in Full" on credit report (it will say "Settled in Full" - will not mention for how much). They were adament that is against the law to represent it as "Paid in Full", when it is not.

-I was not able to negotiate lower than offer I got in mail - 25% of total debt owed (but I think this is pretty good all things considering, paying $8k to settle $31k - which I never would have been able to afford lump sum)

-They are going to send me a letter 14 days after receiving payment to give me a record of the transaction that I can use for my records (update credit score if Chase doesn't, record for future collections, etc.)

I'm going to pay via Bank of America Bill Pay (found this recommended as one of the safest ways online), rather than:

-paying on the phone (won't have a record)

-online with debit card (they could overcharge my account, or repeatedly bill me)

-or with a check (same as debit card because they'll have acct/routing #)

I don't know if I'm being too cautious in terms of payment, but this is a lot of money (to me). The other options are cashier's check or money order both which seem inconvenient (can't just pay online).

QUESTION/Major concern: my girlfriend brought up to me that I might owe taxes on the money that is being settled (ex. $31k owed - $8k settled = $23k taxable income.. could be a lot of money). Does anyone have insight on this (has anyone dealt with this in the past)? Is there anyway I can avoid an exorbitant tax bill? It seems like owing money to the IRS is even worse than owing money to collections agencies! I may create a separate thread (after doing more research) on this topic, if I don't get any replies here.

Next steps: 

1. pay ARS after receiving Debt Verification letter

2. call next Collection Agency (United Collection Bureau representing Citibank for debt of $2200)

[Anonymous]

I would think that getting a 1099 for the forgiven debt might be a possibility (I know it is with a mortgage - friend of mine is undergoing BK7 to avoid foreclosure, which would 1099 him for the foreclosed-upon amount), but since your debt is being forgiven above the $8000 amount, I’d think it unlikely. Hopefully someone who has undergone a similar debt forgiveness will chime in, but in the reading I’ve done here and seeing others talk of 25-30% settlements, I don’t recall tax implications coming up in the conversations...

[Anonymous]

RE: ImTheDevil

Thanks for the response. Seeing some articles online that are definitely getting me concerned about the tax implications. Such as: https://www.creditcards.com/credit-card-news/forgiven-debt-1099C-income-tax-3513.php

They're recommending to "Consult a tax adviser before finalizing a debt settlement, and ask for a tax preparer who is knowledgeable about 1099-Cs."

From what I've read online, need to prove I'm insolvent for the entire amount that is being forgiven ($20k+). Apparently this is something the collections agencies intentionally avoid telling you. Then you settled the debt, and you get a big bill come tax time. 

The cynical part of me wonders if this was conveniently left out of the conversation I had when settling this debt. Maybe that's why they send you a letter 14 days after debt is settled (probably includes a 1099-C?). Also, probably why to quote the manager at ARS "it's illegal" to mark a debt as "paid in full" if it isn't. 

Feeling kind of frustrated, because I just want to settle this debt and move on with my life, but I'm hesistant not to take this seriously as this bill could be thousands of dollars (maybe close to the same amount I'm settling). Not sure what to do (I guess I have to contact a tax adviser) - but this is going to cost more $$ and more time.

Weighing my options:

1. Settle this debt before contacting tax advisor

OR

2. Wait to settle debt and contact tax advisor first

I'm tempted to go with #1 because:

-I need to get my credit cleaned up ASAP, so I can start looking for apartments.

-Maybe if I pay all my debts at once my savings will go to $0 and I will actually be insolvent, and I'll have the bank statements to prove it 

But I'm slightly terrified because:

- A miscalculation could result in something like a $6600 tax bill from the IRS that I won't be able to afford. :/ 

- Not sure how my paycheck factors into this? 

Any thoughts? 

[Creditaddict]

You will receive a 1099 for any amount over $600 written off or whatever... it is what it is.

[Anonymous]

RE: Creditaddict

Thanks for the response. I contacted my accountant and I feel a lot better about the situation.

[Anonymous]

Just wondering what did your accountant have to say about it? 

[gdale6]

I do believe that there are no tax ramifications for amounts written off in foreclosure or amount less than owed in a short sale through the end of the year. I recently saw it will be up to Congress to renew or not for 2019 Tax Year.

[Anonymous]

Actually, a friend of mine is declaring BK7 to absolve himself of his house due to incorrect tax assessment (payments ballooned from 955/month tax and mortgage, to 1685/month. He was advised by an attorney that if he allowed it to be foreclosed, he’d be 1099’d for taxes on the loss. Might be a state by state thing though - we are in NY. By filing BK7, he is absolved of the tax burden on the loss...