Debt Settlement

Will I Get Sued if I Do Debt Settlement?

Written by Steve Rhode

Question:

Dear Steve,

AGE 66 and husband is 61 tomorrow, I am considering going with a debt settlement co., it I have a friend that did this last year and he is being sued by Barclays and Walmart.

I don’t want to get sued if I go the debt settlement route. My husband is having a hard time getting a job and I am disabled. Any suggestions would be appreciated thanks.

Best company to use for debt settlement so I don’t get sued. Thx

Judy

Answer:

Dear Judy,

The answer if you want any chance of being sued would be to avoid debt settlement and look at a solution like bankruptcy that would give you the most comprehensive legal protection from your creditors.

Here is why the risk of being sued always exists with debt settlement.

  1. To get into the creditor department that is willing and able to consider your offer for less than you owe you need to be in default on your debt.
  2. Typically you need to be at least 90-days-delinquent. Your debt will eventually charge-off and the default and charge-off will be reported on your credit report. A charge-off is purely an accounting function and you may receive a 1099-C form that is also reported to the IRS. If you are not insolvent then you may owe income tax on the forgiven debt.
  3. Creditors are not always efficient and not all creditors may sue fast or at all. Your friend is a good example of this.
  4. Another complication is if you don’t have the cash on hand to settle and will have to default for a longer period of time to save up the money to use for the settlement.
  5. The longer you are in default the higher the risk is of being sued. But creditor policies change and a creditor who sued quickly last year might not this year.

I know you wanted to know which is the best debt settlement company to use to not get sued, but that is an impossible question. No debt settlement company has control of creditors or their internal policies or procedures.

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Frankly, given your age and health condition, I can’t imagine that debt settlement is the choice I would leap towards. It might just be that you are behind on saving for retirement with just your husband working.

In that case, the faster you can eliminate your debt and get back to living within your income and saving, is the most critical consideration.

To do this, bankruptcy is the least expensive and fastest way out of a horrible situation. Besides, those that file bankruptcy often do better financially than those who don’t.

If you are confused about what solution is the best for you I would suggest you talk to Damon Day and run through your current situation and the goals you would like to achieve. Damon is very talented in creating a customized plan to help you find the right path.

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About the author

Steve Rhode

Steve Rhode is the Euro-Video and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

6 Comments

  • Steve, that is very interesting. I have never seen it happen. We have even had the credit bureaus zero balance accounts that had 1099s issued for them.

    • One more totally crazy thing. If you have an erroneous 1099-C issued the IRS does not have a form for that. You have to call and speak with a representative. Yet, late 1099-Cs are issued every day.

      Keep up the good work and thanks for reading and commenting.

  • Steve, I own a DS company in Texas. Creditors cannot send debtors a 1099C for a chargeoff, becasue chargeoffs are still collectable. It’s when a creditor agrees to a settlement (the creditor waives the remaining unpaid balance) or when a creditor abandons all collection efforts (waives entire balance) that it’s considered forgiven debt/taxable income.

    I love your page. Keep up the great work. Kyle

    • Actually…it’s complicated.

      Thank you so much for commenting Kyle.

      So you can have a creditor policy that triggers a quick 1099-C.

      It all depends on the creditor policy and they may and some do consider the debt worthless when it reaches chargeoff. See item 7 below. Additionally, just because the original creditor has abandoned the debt does not prevent them from selling it on to a number of debt buyers anyway.

      You are right that a charge off is still a collectible debt and there is case history that debt with a 1099-C issued is still collectible as well. See https://buckleyfirm.com/sites/default/files/Buckley-Sandler-Article-Neither-forgiven-nor-forgotten

      The IRS has stated they, “[do] not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection. In the years since the IRS letter, courts and financial regulators have continued to reaffirm that issuing a Form 1099-C does not discharge a debt, and therefore collection actions can continue.”

      As you know, the 1099-C and chargeoff are tax reporting requirements and may not alter the underlying validity or collection of the debt.

      Here is what the IRS has to say about the 1099-C.

      “A debt is deemed canceled on the date an identifiable event occurs or, if earlier, the date of the actual discharge if you choose to file Form 1099-C for the year of cancellation. An identifiable event is one of the following.

      1. A discharge in bankruptcy under Title 11 of the U.S. Code. For information on certain discharges in bankruptcy not required to be reported, see Exceptions,later. Enter “A” in box 6 to report this identifiable event.

      2. A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal nonbankruptcy or state court proceeding. Enter “B” in box 6 to report this identifiable event.

      3. A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired. Enter “C” in box 6 to report this identifiable event.

      4. A cancellation or extinguishment when the creditor elects foreclosure remedies that by law extinguish or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised. Enter “D” in box 6 to report this identifiable event.

      5. A cancellation or extinguishment making the debt unenforceable under a probate or similar proceeding. Enter “E” in box 6 to report this identifiable event.

      6. A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration (for example, short sales). Enter “F” in box 6 to report this identifiable event.

      7. A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor’s defined policy can be in writing or an established business practice of the creditor. A creditor’s established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. Enter “G” in box 6 to report this identifiable event.

      8. Other actual discharge before identifiable event. Enter “H” in box 6 if there is an other actual discharge before one of the identifiable events listed above.”

      The 1099-C is expected by the IRS, “Generally, file Form 1099-C for the year in which an identifiable event occurs. See Exceptions, later. If you cancel a debt before an identifiable event occurs, you may choose to file Form 1099-C for the year of cancellation. No further reporting is required even if a later identifiable event occurs with respect to an amount previously reported. Also, you are not required to file an additional or corrected Form 1099-C if you receive payment on a prior year debt.” – https://www.irs.gov/instructions/i1099ac#idm140146280946576

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