Are Debt Settlement and Negotiation Agencies Recommended

Are Debt Settlement and Negotiation Agencies Recommended

DEBT SETTLEMENT AND DEBT NEGOTIATION

It is virtually impossible  to turn on the television or radio without hearing or seeing an advertisement for debt settlement.

The companies that advertise their services for debt settlement offer a myriad of different approaches to “settling” the debts of their clients.

Debt settlement in its simplest form is offering a creditor a lower payoff of the debt than what is owed.

I would not say there is never a time for entering into negotiations with a creditor regarding the settlement of debt, because the individual circumstances of each Debtor varies on a case by case basis.

I have seen multiple clients in the last several months who had hired companies to settle their debts and ended up in my office frustrated that they could not afford the payments on their settled debts or were facing the continued collection activities from a particular creditor.

If you choose to enter into negotiations with a creditor regarding the settlement of a debt, I recommend that you handle the negotiations yourself rather than paying a third-party to do what you could do independently.

In my bankruptcy practice I have discovered time and time again that clients would have been much better suited to have filed a bankruptcy than to have hired a third-party to settle or negotiate their debt.  Some of the reasons for this are:

  1.  The debt settlement company generally sends nothing to the creditor until they have accumulated payments from you over an extended period of time, and they take a portion of whatever you pay them as their fee for their services.  If you drop out of the debt settlement program don’t expect to receive a return of any of your money. Most debt settlement companies have drafted their contractual agreements to keep whatever you have paid them.
  2. f you don’t have a written agreement from the creditor that the amount they have agreed to accept is payment in full, then they may sell the remainder of the debt to a junk debt buyer or to a collection agency to collect.
  3. Forgiven debt through a settlement is taxable income and you will receive a Form 1099-C from the creditor for any debt above $600 that is forgiven.  Forgiven debt in a bankruptcy is not income as to the Debtor.
  4. When you factor in the interest for the period of time that a creditor is not receiving payments and the income tax consequences of forgiven debt it is likely that you are really not saving any money.
  5.  Your credit rating is still going to be ruined with any debt settlement. This is probably the greatest benefit of bankruptcy over debt settlement.  If you are in a debt settlement program that will take years to complete, then the credit rebuilding process will not begin until the creditors are paid according to the negotiated settlement. In a bankruptcy the Debtor begins the rebuilding process immediately after the bankruptcy discharge is entered.

From my experience as a bankruptcy attorney I have repeatedly heard clients tell me that they wished they would have filed for bankruptcy protection rather than to have wasted their time and money with a debt settlement company.

Remember that if you do chose to enter into negotiations with your creditors regarding the settlement of your debt, then do it yourself, don’t pay someone to do something that you can handle on your own.

Please give us a call for a free consultation if you are in financial difficulty and are weighing the choice of a bankruptcy or debt settlement.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law, can be very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

Post-Petition Mortgage Payments

Post-Petition Mortgage Payments

MORTGAGE PAYMENT

If you are in a Chapter 13 bankruptcy and you are making mortgage payments, your plan of reorganization requires that those payments be made in a timely manner

When we use the term “post-petition” mortgage payments we are referring to those payments that come due after the bankruptcy case is filed.

Since a lot of Chapter 13 bankruptcies are filed because the Debtor is delinquent in mortgage payments, it is important for the Debtor to remain current with the post-petition mortgage payments. 

If a Debtor fails to remain current on the post-petition mortgage payments, then the mortgage company will move the bankruptcy court to lift the automatic stay to proceed with foreclosure.

If the mortgage company moves the court to lift the stay, then the Debtor will likely face additional fees from their attorney and could likely face additional attorneys fees for the mortgage company’s attorney.

Because mortgage companies are not perfect in their record keeping we always suggest that you make your payments in a manner that will provide proof of the payments. 

A copy of a money order, western union or cashier’s check is recommended.

If you are making the payments by personal check, then make sure you keep copies of your cancelled checks or bank statements.

All post-petition mortgage payments in the Eastern District of Texas are currently made directly by the Debtor.  In other words, the payments are not made by the Chapter 13 Trustee and are not covered by the plan payments being made by the Debtor.

Taxation of Forgiven Debt

Taxation of Forgiven Debt

Taxation of forgiven debt is generally taxable to the Debtor.  However, one of the most beneficial aspects of bankruptcy is that debt discharged in a bankruptcy is not taxable to the Debtor.

All bankruptcy is governed by Title 11 of the United States Code.  Section 108 of the Internal Revenue Code (26 U.S.C. §108) provides that gross income does not include any amount of income discharged in a case under Title 11 (Bankruptcy Code).

Creditors quite often send Debtors a Form 1099, which reports miscellaneous income to the Internal Revenue Service (hereinafter “IRS”), even after the Debtors have discharged the indebtedness in a Title 11 bankruptcy case.

The Debtors should use IRS Form 982 to report to the IRS that the debt was discharged in a Title 11 case. 

I have attached a copy of the Form 982, which you can access by clicking on Form 982. If you have debt that has been discharged, check box 1a of Part I of the form and write the total amount of the debt discharged in line 2 of Part I.

Form 982 should be completed for the tax year in which the forgiven debt is reported to the IRS.

 

Discharge of Income Tax Liability in Bankruptcy

Discharge of Income Tax Liability in Bankruptcy

INCOME TAX AND BANKRUPTCY

There is not a simple answer to whether or not income tax liability is dischargeable in a bankruptcy.  Under the right facts and circumstances income taxes can be discharged.

First, if a return was never filed for the taxes prior to filing for bankruptcy, then the taxes are for sure non-dischargeable under Section 523(a)(1)(B)(i) of the Bankruptcy Code.

Also, if the taxes are associated with a return that was filed within two years of a bankruptcy, then the taxes are non-dischargeable under 523(a)(1)(B)(ii) of the Bankruptcy Code.

For illustration, if the Debtor owes income taxes for the tax year ending 2006, but does not file the return until 15 months prior to the filing of the bankruptcy petition on January 1, 2011, then any taxes owed would be non-dischargeable.

If the Internal Revenue Service files a federal tax lien on the income tax liability that is due, then they have a secured clam in any bankruptcy and the lien survives the bankruptcy to the extent there is collateral to secure the lien.

To determine if taxes owed that don’t fall into the above categories are dischargeable, Section 523 must be read in conjunction with Section 507 of the Bankruptcy Code.

Section 507 would make any tax liability non-dischargeable if the taxes are associated with a return that was due, including extensions, less than three years prior to the filing of the bankruptcy petition.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law, can be very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

Retaining or Keeping Credit Cards when Filing for Bankruptcy

Retaining or Keeping Credit Cards when Filing for Bankruptcy

By Mike Wallace, Bankruptcy Attorney, serving clients in all of East Texas, including Lufkin, Nacogdoches, Palestine, Jacksonville and other surrounding communities

One of the most frequent questions I get from clients wanting to file for bankruptcy protection is whether they than can keep a credit card out of their bankruptcy.  This question assumes a couple of different possibilities that the client might be facing.

First, they owe a balance on the credit card and they want to keep making the payments on that card, so they can use it in the future.  If the creditor is owed money then this scenario is impossible in a bankruptcy filing because the creditor has to be named in the schedules.  Once the creditor receives notice of the bankruptcy filing they will cancel the card.

The second possible scenario is the credit card has a zero balance just prior to the bankruptcy filing.  In this case the crditor is not listed in the schedules as being owed money, so they don’t receive the official bankruptcy notice that goes to all of the creditors.  However, creditors regularly monitor credit databases and other public information to determine if their cardholders have filed for bankruptcy.  In my years of bankruptcy practice I have never seen a situation where the creditor did not learn of the bankruptcy filing and cancel the card.

In conclusion, the answer is that you cannot keep a credit card if you file for bankruptcy protection.  However, bank debit cards work just the same as a credit card, with the obvious limitation that you have to have the funds available for the charge in your bank account.

As always, any opinions expressed on this website are just that, opinions. So if you have a question regarding bankruptcy or debt relief, then please give me a call to discuss your individual situation.  Bankruptcy, as many other areas of the law are very case or fact specific.  I pride myself on giving you the answers to your questions that are based on your individual circumstances.

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