A Note About Creditor Settlements

Most creditors eventually propose a settlement amount if the debt isn’t being paid. (By the way, most creditors do NOT accept a settlement if the debt is being paid.)

A creditor who accepts settlement of less than the full balance of the debt will issue you an IRS Form 1099-C at the end of the year if the deficiency (ie, the difference between the amount owed and the amount paid in settlement) is greater than $600. You will have to file Form 1099-C with your tax return. Depending on your personal financial circumstances, this may result in additional taxable income to you. There are some defenses, including a discharge of the deficiency in a bankruptcy proceeding, insolvency, and others that are discussed in IRS Form 982. I’ve included two helpful links to the IRS regarding Forms 982 and 1099-C. If the deficiency is less than $600 then the creditor does not have to send you a Form 1099-C. Here are the links:

Form 982

Form 1099-C

Before accepting a settlement it is important to memorialize the terms of the settlement in writing. This can be as simple as a statement from the debt collector that it will settle the debt for $X in full satisfaction of the claim and will release you from the balance. Unfortunately, I have had several clients negotiate debt settlements on their own, not get the settlement in writing, and be pursued for the debt after paying the agreed upon settlement amount. Without something in writing you are reduced to a “he said, she said” situation in Court if the creditor sues you for the balance.

Will these guys settle?

Will these guys settle?

Finally, I rarely advise clients to give post-dated checks to creditors or to allow access to personal bank accounts. I have had clients come to me after sending a creditor a post-dated check which the creditor agreed to deposit after an agreed-upon date, only to have the creditor deposit it immediately. If there are insufficient funds to cover the check, the creditor can swear out a criminal warrant for passing a bad check. As for giving a creditor access to a bank account, I have seen too many people have their accounts drained for the full amount of the debt- rather than the agreed upon settlement amount- by an unscrupulous creditor. Similarly, I have had clients agree to a monthly automatic draft, only to have the draft continue after the agreed-upon end date. DON’T give anyone access to your bank account!

There are a multitude of considerations before agreeing to settle a debt. Sometimes, it is a good idea. However, it is often a bad idea, particularly if settling a particular debt will not resolve all of your debt problems.

At Kight Law Office, PC, we counsel people on all aspects of debt problems. We will work with you to find a solution that fits your particular situation. Contact us to schedule a time for us to answer your questions.