We recently ran an article regarding eliminating your debts and similar obligations without filing for bankruptcy. Many readers called us with a variety of questions, some of which I want address in this follow up article.
First of all, one of the most utilized services these days by our clients is attorney assistance with negotiation and elimination of credit card obligations. The main question we get from clients is, “We don’t want to file for bankruptcy, but our debts far exceed our assets, the value or equity in our home is gone and we have thousands of dollars charged on our credit cards, what can you do to help us?”
My answer is that, over the past ten years we have been able to negotiate client’s debts with credit card companies down by approximately 70-85% of the total outstanding balance existing at the time you retain our firm. For example, if you have a $10,000.00 credit card debt owing to Chase Bank, we have been fully and finally settling this type of obligation for approximately $1,500 – 3,000. That is a saving of roughly $7,000 – 8,500 to you depending on the specific financial situation of each client.
The next question we get asked is “How does your negotiation actually work?” The concepts are employ is no different from our handling of complex business matter. We take a hard negotiation position that has factual and legal basis and try to achieve the best result for you. If we take the $10,000.00 Chase Bank example, once our client has stopped paying on the card due to his/her financial inability to continue to make payments (which are in many cases interest only, so the debt never gets reduced), Parker & Wenner, P.A., sends out a settlement offer (after meeting with our client and setting up a plan of action) to Chase offering 20% ($2,000.00) of the outstanding debt as a full and final settlement of that account. In the letter we set forth the reasons that our client is unable to pay more, such as unemployment, health issues or overexposure to the real estate or other markets.
After receiving our settlement offer the credit card company or a collection agency engaged on its behalf, contacts our office regarding settlement of the account. Typically, the settlement proposals from the credit card company start at a discount of 50-60%. However, we have been successful in getting the discount up to 60-85% of the outstanding balance. Once an agreement has been reached on the settlement amount ($2,000.00 in our example) the credit card company or its representative sends our firm a letter acknowledging same and requesting payment. We confirm the settlement amount with our client and then send a final settlement letter to the credit card company accepting the settlement and providing payment instructions via automatic withdrawal from the client’s bank account. We receive a confirmation letter when the payment is received indicating the matter is closed.
Finally, another important issue that gets raised is the potential tax liability for the settled or reduced debt amount. The credit card company often sends a form 1099 to the IRS indicating the amount of the discharged debt. The IRS will treat this amount as income unless the client can demonstrate that he or she was “insolvent” at time of settlement and is therefore exempt from tax under Section 108 of the IRS Code. The IRS, pursuant to Section 108 does not tax the discharged indebtedness of individuals it considers to be insolvent; in other words when the individuals’ liabilities exceeded the fair market value of their assets immediately prior to the settlement date. There are also other exclusions from income that may apply to an individual case, such as the Mortgage Forgiveness Debt Relief Act. Consequently, with the help of a good CPA or tax preparer, clients who qualify as “insolvent” avoid any income liability to the IRS as a result of the settlement.
If you have any questions regarding debt consolation or negotiation, whether that debt was accumulated in the form of credit cards or other loans call 612-335-2200 for a free telephone consultation. Each situation is different and requires independent analysis and advice.