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Debt Settlement and Your Taxes

Saturday, December 17th, 2011

Debt settlement ads are very attractive to individuals struggling with debt. The promise is to reach an agreement you can afford to pay. The debtor agrees to pay a percentage of the debt (usually in a lump sum), and the creditor agrees to release the remaining obligation. Sounds simple, right?

Unfortunately, many times the debtor will receive a nasty surprise in the mail: an IRS Form 1099-C: “Cancellation of Debt.” You see, the U.S. Internal Revenue Service considers forgiven or canceled debt as part of your income. In fact, any creditor who agrees to accept at least $600 less than the original balance is required to file a 1099-C form with the IRS and to send debtors a canceled debt notice. If you have negotiated a debt settlement, you must report the forgiven or canceled debt as income on your federal income tax return. This usually causes a tax debt, since no money was withheld from this “income.”

There is an exception to this situation. If you were insolvent at the time the debt was settled, the cancelled debt is not considered income. The IRS instructs the taxpayer to “determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.” Let’s say your net assets after subtracting your liabilities amounts to $5,000. If you negotiate a debt settlement for $10,000, you must pay taxes on the first $5,000 of the cancelled debt. If your tax rate is 25%, you may Uncle Sam over a thousand dollars!

For debtors who have negotiated big savings through a debt settlement company, a large tax debt can be a slap in the face. Owing the federal government is much worse than owing a credit card company. Here are some interesting “facts” about owing the IRS:

  • the IRS does not have to obtain a court judgment before garnishing your wages;
  • recent tax debts are not dischargeable in bankruptcy;
  • the IRS can intercept future tax refunds and even government benefits like social security to pay your income tax debt.

Congress has made sure that all debts discharged during bankruptcy are excluded from “Cancellation of Debt” income. If your debt is discharged, the debt cannot be collected from you in the future, and you owe no taxes on it. If you can afford to repay a part of a debt, a Chapter 13 bankruptcy will allow you to pay what you can afford, over three to five years, and the remaining debt is discharged without a “Cancellation of Debt” tax obligation. If you cannot afford to repay any part of the debt, a Chapter 7 can discharge the debt within a few short months.

Debt settlement often makes a bad situation worse. Before you commit to a settlement process to eliminate your debts, speak with an experienced bankruptcy attorney. You deserve to know all of the consequences before agreeing to any financial program – including any potential tax liability. Your attorney can explain the pros and cons of debt settlement and bankruptcy, and can help you decide on the best course of action.

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8 Reasons to Stay Clear of Las Vegas Debt Settlement Scams

Wednesday, September 14th, 2011

In the movies, you’ll see a con artist, often played by an unusually handsome actor, tricking wealthy people (who deserve it) out of their money. It often makes for good entertainment. Will the victim con the con artist; what if the con artist develops a conscience, etc.?

In real life, though, scammers target the poor, not the rich. People with large amounts of debt are vulnerable, and that makes for prime marks. The best weapon the con artist focusing on the indebted has is people’s fear of bankruptcy and the shame they wish to avoid by filing it.

The preferred tool for extracting money from those with large amounts of debt? Debt settlement companies.

The concept is simple: the debt settlement company offers to broker a deal with your creditors to pay them a lump sum in exchange for keeping you out of bankruptcy.

Here are eight reasons to go the bankruptcy route instead:

(1)  Credit card companies are willing to settle, but they prefer lump sum payouts (naturally) to installment plans. Debt settlement companies will require you to send them money before they even contact your creditors. Therein lies the scam. You sacrifice your income and hand it to a company that isn’t obligated to do anything until you send it more money.

(2)  Their written agreements usually do not contain the promises made on their websites, or they charge more for them. Bait and switch.

(3)  Your creditors will not wait for you. If you default, they will sue you and the debt settlement company will do nothing. Worse, the debt settlement company may encourage you to pay it before the banks with which you owe debt in the first place. It may even tell you to stop paying your banks entirely. Bad move.

(4)  Debt settlement companies are routinely located out of your state. They cannot represent you in court if your credit card companies sue you to collect on your debts. Being out of state also makes it harder for you to sue them or demand a refund. For that you’ll have to hire a lawyer from their state, and lawyers may decline your case as there may not be enough money in it for them. If you’re lucky, you may benefit from a class action lawsuit against the debt settlement company, but don’t expect to get even close to a full refund.

(5)  Debt settlement companies often charge their fees up front. The Federal Trade Commission barred them from doing that in fall 2009, but that won’t stop some of them. Moreover, the FTC rule exempts Internet sales and in-person transactions. They’re out of state, and they’re often found on the Internet. This makes for easy debt settlement income, none of which is held in trust.

(6)  Debt settlement companies will almost never explicitly tell you that you will pay income tax on any forgiven debt.

(7)  Your credit rating will become worse as your debts mount than if you’d filed bankruptcy.

(8)  In many cases, people who pay money to debt settlement companies end up filing bankruptcy anyway. Debt settlement delays the inevitable, but it makes the situation worse.

By contrast bankruptcy attorneys are officers of the court. They are bound by rules of professional conduct that are rigorously enforced by bar authorities. Those who feel their attorney wronged them can use the attorney grievance system for redress.

For these reasons, consulting a bankruptcy attorney is a far better alternative to debt settlement.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 702-880-5554 today!

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Las Vegas Debt Collection and Your Rights

Monday, March 28th, 2011

Debt collectors can be ruthless. Persistent telephone calls at home and work, embarrassing letters in red envelopes, calls to friends and family, and even public posts to your Facebook account are all dirty tactics that debt collectors employ to harass you into paying. Fortunately, there are laws that protect you from unlawful creditor harassment.

The Fair Debt Collection Practices Act, or FDCPA, is a federal law that protects against abusive collection practices by third party collectors. Third party collectors include collection agencies and collection attorneys. The FDCPA does not apply to business debts or to original creditors. The FDCPA prohibits certain abusive practices including:

  • Telephone calls before 8 a.m. or after 9 p.m. (your time);
  • Requesting payment beyond what is actually owed;
  • Using abusive, profane or obscene language;
  • Threatening legal action which is not permitted by law (e.g. criminal action);
  • Telephone calls at work after being instructed that your employer prohibits phone calls from debt collectors;
  • Contacting you directly after being instructed that you are represented by an attorney

Another federal protection is the Fair Credit Reporting Act (FCRA). The FCRA is designed to promote accuracy and ensure the privacy of the information used in consumer credit reports. The FCRA contains a dispute process for correcting inaccurate information placed on your credit report.  More information about the Fair Debt Collection Practices Act and the Fair Credit Reporting Act can be found on the Federal Trade Commission’s Bureau of Consumer Protection website.  The FTC is charged with enforcement of both acts.

Hiring a bankruptcy attorney provides immediate relief from creditor harassment under the FDCPA, and all collection action must cease the instant you file a bankruptcy case. This protection lasts the duration of your bankruptcy and is replaced with the bankruptcy discharge at the end of your case. A creditor who violates these bankruptcy prohibitions can face a contempt of court charge in the federal bankruptcy court.

Don’t let creditor harassment overwhelm your life. Take charge by consulting an experienced Haines & Kreiger Las Vegas bankruptcy attorney about your debt and learn how the federal and state laws can protect your property, your income, and your peace of mind. Call us at 702-880-5554.

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Debt Collection After a Las Vegas Bankruptcy

Sunday, January 30th, 2011

Your bankruptcy discharge prohibits certain creditors from collecting from you personally after your bankruptcy case.  So what happens when a creditor contacts you after your discharge?  The answer depends on the situation and first involves answering three questions: (1) “Was the debt discharged in bankruptcy?” (2) “Is the collection directed at the discharged debtor?” and (3) Was the creditor notified of the discharge?”

Discharged debts are no longer legally enforceable against the debtor.  The discharge injunction is a court order from a federal bankruptcy judge prohibiting creditors from filing lawsuits, sending collection notices, or making collection phone calls.  Substantial sanctions may be imposed on a creditor that violates this order.  However, some debts are not discharged.  It is important to discuss your discharge with your attorney and understand which debts are included in the discharge and which are not.  For instance, taxes, student loans, and family support obligations may not be subject to the discharge.  In other cases a debt may be excepted from discharge by the court.

Your discharge only protects you from collection efforts.  It does not protect a co-debtor who did not also file bankruptcy, and, as a general rule, it does not protect property that is subject to a lien.  Therefore, it is important to understand how your property is affected by the bankruptcy discharge and whether a creditor can seize, repossess, or foreclose on the property after your bankruptcy.

As a practical matter, if a collector does not know about your bankruptcy discharge, the bankruptcy court is not likely to impose sanctions against it.  Often a collection attempt can be resolved by informing the collector of the discharge and either providing a copy of the discharge or referring the collector to your attorney.  Buying and selling debt is big business, and debts often get passed from collector to collector – even uncollectible debts like those discharged in bankruptcy!

Your bankruptcy discharge injunction applies to the original creditor, collection agencies, attorneys, and any other subsequent collector.  Don’t let creditor harassment disturb your peace of mind.  If the answer to the above three questions is “Yes, Yes, Yes,” the collector has violated the bankruptcy court’s discharge order.  Contact your attorney and discuss the best course of action to stop the harassment.

For a free Las Vegas bankruptcy consultation, contact the offices of Haines and Krieger at 702-880-5554.

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Is Las Vegas Debt Stress Affecting Your Health? 4 Signs.

Tuesday, January 4th, 2011

Dealing with debt (along with moving and starting a new job) is one one of the top life stress events.  And there’s no dispute that stress does affect your health.

How do you know if your current debt situation is directly affecting your health?

1.  Unexplained aches and pains and/or auto-immune reactions such as a rash or even hair falling out.  Sometimes when you’re stressed you get so used to it you don’t even realize how much tension you’re holding in your muscles.  Stay aware of what your body is doing, how it’s responding and any changes over time.  Getting relief from debt can really change your perspective on life as well as your health status.

2.  Attention deficit.  Not the disorder (as in, ADD), but simply having trouble keeping your attention focused on important things such as your work.  If you’re too busy worrying about creditors to the point where you’re distracted from working, then you’re also jeopardizing your primary source of income.  And it’s time to seek help and seek debt relief.

3.  Excessive alcohol and drug use.  Drugs and alcohol are forms of escape.  And if you’re facing significant debt problems, then it’s completely reasonable to have the urge to escape.  What’s not reasonable, however, is letting alcohol or drugs add difficulties to your current situation.  If you realize this is happening, seek some help and look into debt relief.

4.  Lack of sleep.  If you’re not sleeping because of the stress and worry of your debts, then you’re potentially digging a deeper hole for yourself.  People simply can’t function effectively without sufficient sleep.  Lack of sleep hurts your memory, your ability to think clearly and your ability to do your job effectively.  All things you need to earn income and deal with difficult debt problems.

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Las Vegas: When Paying Your Debts Can Cause Trouble

Friday, November 26th, 2010

Many tough decisions are made when a family is struggling with debt.  Often debts are paid according to priority.  Those bills at the lowest priority may not get paid at all.  While this may be a good strategy under ordinary circumstances, it may back-fire when a bankruptcy is imminent.

The act of paying one creditor while ignoring another is called a preference payment by the bankruptcy laws.  The debtor preferred to pay one creditor and not others.  A preference payment is defined as a transfer of money made before a bankruptcy filing, to pay on a pre-existing debt, made while the debtor is insolvent, and gives the creditor more than it would receive from the liquidation of the debtor’s assets during a Chapter 7 bankruptcy.

In deciding who should get paid first, the Bankruptcy Code divides creditors into classes and creates a hierarchy of preferences.  For instance, the Bankruptcy Code prefers that child support is paid before credit cards, and that a secured car payment is paid before a medical bill.  In many cases a pre-bankruptcy preference payment is perfectly fine; in other cases it can create trouble for the debtor and the creditor.  This is especially true when one creditor in a class receives more than other creditors in the same class, or a creditor in a lower class receives money before creditors in higher classes.

When a preference payment occurs within 90 days of the bankruptcy filing, the bankruptcy trustee can ask the court to order the preferred creditor to turn over the payment(s) for distribution according to the hierarchy of preferences.  This period is increased to one year if the creditor is an “insider” creditor.  An “insider creditor” is generally a relative, business partner, etc. who has a special relationship with the debtor.

Common preference payment scenarios include:

1.     Repaying a personal loan from a family member just before filing bankruptcy;

2.     Paying one business vender, while ignoring others.

3.     Transferring a credit card balance from one card to another.

4.     Paying off a credit card, medical bill, or personal loan just before bankruptcy.

When the trustee requests turnover of a preference payment, the creditor is faced with either complying with the request or litigating the matter in bankruptcy court.  There are legitimate preference payment defenses which largely depend on the circumstances of the payment.  However, the general practice of bankruptcy trustee is to sue first and ask questions later.

If you are struggling financially, seek out legal advice early and avoid making mistakes with preference payments.  An experienced Haines & Krieger bankruptcy attorney can help you make wise financial decisions and avoid preference payment situations. Call us at 702-880-5554 to see up your free consultation.

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Debt collector scam defies belief

Thursday, November 4th, 2010

Las Vegas may be the “foreclosure capital” of the U.S.  But Erie, PA may now be the country’s “bizarre debt collector scam capital.”

Apparently, a debt collection company called Unicredit, Inc. (also known as “Unicredit Debt Resolution Center”) decided it would be more effective in its efforts if it set up its office to look like a court.  Everything from court-like furniture to a judge-like raised bench to a guy dressed in black who would periodically sit at the raised bench (though apparently without saying anything).  They issued civil subpoenas and even had employees refer to the designated area of their office as “the courtroom.”

The debt collector’s intent was to intimidate less sophisticated debtors by tricking them into believing that there was some sort of official process going on.

Needless to say, this did not go unnoticed by the Pennsylvania State Attorney General’s office, which issued a press release stating:  “Fictitious court proceedings were used to intimidate consumers into providing access to bank accounts, making immediate payments or surrendering vehicle titles and other assets – sometimes dispatching Unicredit employees to consumers’ homes in order to retrieve documents or have consumers sign payment agreements.”  read more

It’s just one more example of the lengths to which debt collectors will go to get money from people.  We understand that debt collectors have a job to do.  But this approach is rather scary.  And it’s not like it was one bad apple in a phone center.  This was clearly a top-down decision by management.  (Which makes you wonder what the strategy meeting discussions must have been like and how the idea was even brought up.)

This is also a reminder to be mindful of debt collection scams.  There are many things that debt collectors are not legally permitted to do.  Simulating a court is an obvious one.  But other infractions are not as clear cut.

If you’re having debt collector problems, or you have questions about what’s legal and what’s not, please feel free to contact an experienced Haines & Krieger attorney at 702-880-5554 for a free initial consultation.

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Las Vegas Student Loan Debt: 7 Things That Can Happen if You Default

Thursday, September 23rd, 2010

Student loan debt has now surpassed credit card debt – read more.  Congress is making noise again about permitting student loans to be discharged in bankruptcy – read more. (FYI, at present student loan debt has special status that makes it particularly hard to get rid of.)

Student loan debt is a serious problem for many Las Vegas residents and for our economy.  And it’s important to understand what can happen if you do default on your student loans.   So what can happen?

1.  You lose the ability to negotiate a deferment or forbearance from your lender.  Once you default, your student loans are considered due immediately.  And once this happens, the door is closed on deferments or forbearances.

2.  Any tax refunds you might otherwise receive are subject to seizure by the government.

3.  Garnishment of wages.  The government can take up to 15% of your wages.

4.  Ineligibility for FHA or VA mortgages in the future.  In other words, it may be harder to buy a home down the road.

5.  Loss of Social Security.  When you get older and start collecting Social Security, the government can still come after you and take a portion of those payments.

6.  Possible lawsuit by the federal government against you to collect.

7.  Significant damage to your credit score.

What to do to avoid this?  Be proactive.  There are effective strategies for addressing student loan debt problems.

Contact your lender to discuss options ahead of time.  Or contact Haines & Krieger at 702-880-5554 for a free initial consultation to help figure out effective strategies for dealing with your student loan debt together with your other debts.

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Las Vegas: 5 Things You Should Know About Debt Collectors

Wednesday, September 22nd, 2010

Debt collectors have a bit of what we call a “reputation problem.”  So is it deserved?  Or entirely without merit?

A Wall Street Journal reporter named Fred Williams decided to find out.  He went to work as a debt collector for a large, mainstream debt collection agency.  And he wrote a book about it titled Fight Back Against Unfair Debt Collection Practices: Know Your Rights and Protect Yourself from Threats, Lies, and Intimidation.

WalletPop.com’s Martha C. White has a helpful interview with Williams that helps flush out some of the highlights of what Williams learned. And from that interview, we think there are…

5 Things You Should Know About Debt Collectors

1.  Debt collectors really will say anything.  They’ll make threats.  They’ll make up information.  Even knowing full well that what they’re doing is illegal.  This is, of course, no surprise to us.  We hear these stories all the time from our clients.

2.  They get away with it to a large extent by using “trainees” to do a large bulk of the calling.  The logic is that if a trainee makes a “mistake,” then the collection agency can cite lack of full training to fend off a complaint.  Pretty sneaky.  Then again, we would expect no less from the collections industry.

3.  If you say you have a lawyer, make sure you really have retained one.  If you don’t, an experienced debt collector will know if you’re making it up.  And if they catch you in a lie, then you’re at a disadvantage.

4.  Record any call or write down detailed notes of your conversation.  It’s standard practice for them to take notes (though not necessarily to record their calls, because why would they want to create evidence against themselves?)  So it’s important for you to have some sort of record as well.  Especially since, according to Williams, debt collectors are not above simply adding information to their notes as it serves their purposes.

5.  Get any agreement in writing!  If you do decide to negotiate a settlement (and fyi, Williams says the end of the month is a better time to do so as debt collectors are under pressure to get payments in by the end of the month for bonus purposes), don’t make any payment until you have received a letter of discharge in writing (i.e., via letter, fax or emailed PDF).  Do not make a payment over the phone under any circumstances.  The only situation when you trust these guys is….never.

Of course, if you need help with debt collectors, we’re always here.  Contact a Haines & Krieger attorney at 702-880-5554 and we’ll know just what to do to help you fight back.

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BBB Warns of Debt Relief Fraud

Friday, May 7th, 2010

The Better Business Bureau recently issued a warning to consumers regarding the misleading practices of debt settlement companies. This warning comes after receiving more than 3,500 complaints since the start of the recession in 2007. The BBB reports that many individuals paid hundreds of dollars in upfront fees to debt settlement companies, but only fell deeper into debt after the process failed.

In an article posted to the BBB website, Stephen A. Cox, President and CEO of the Council of Better Business Bureaus said, “The debt settlement industry is flourishing and many families are being lured into believing that debt settlement is an easy fix and that their credit card debt will just disappear.” Mr. Cox went on to say that “the truth is that the process doesn’t work for many consumers, it has potentially serious negative consequences, and should primarily be used as a last ditch effort[.]”

Debt settlement companies typically offer to negotiate a settlement for a fee. Unscrupulous companies mislead consumers with promises of large savings and quick resolution. The truth is that it is difficult for a non-attorney to obtain a debt reduction of 50% or more. Additionally, these types of settlements are only available with a one-time payment. Most debt settlement companies require an up-front fee and ask the consumer to make payments into a savings account held by the debt settlement company for future settlement. During the process of six months to a year that it takes to build up the account, the consumer is at risk of garnishments and lawsuits.

In some cases fraudulent debt settlement companies have stolen from the consumer accounts, or refused to return funds. In other cases the consumer is driven deeper into debt when the debt settlement company is unable to settle the debt.

Unlike debt settlement, the bankruptcy process is a legal process supervised by a federal judge and the U.S. Department of Justice. Your agent is a licensed attorney throughout the process. There are no hidden fees and you pay only what you are able to afford. At the end of the bankruptcy process your debts are discharged and you receive a financial fresh start ordered by the bankruptcy court.

If you are struggling with debt and need financial relief, speak with an experienced attorney and discover how the federal bankruptcy laws can help you and your family. Don’t be a victim of a debt relief scam.  Contact the attorneys at Haines and Krieger for a free consultation.

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