If I settle a debt, do I pay taxes on "gains", and to whom?
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Posted by Rob on December 17, 2001 at 22:48:00:
Hello again - (this is a continuation from: http://www.cardreport.com/wwwboard12/messages/1832.html ) After soliciting a zillion opinions, I figured out that settling my debts seemed to be the right thing to do. I sold my baby (car - completely owned - my last major piece of personal property), and have begun negotiations with my 3 creditors. I've done my work myself instead of using MyVesta or a lawyer (called two of them, three times each - no answer, no reply!) for now, using templates off this site and others for formal communication. I figured I needed to put the $ towards paying debts instead of lawyers anyway, but may resort to finding one later if things get sticky. Settling debts made sense because I have a huge investment in myself, and (ironically) plan to do Big-5 corporate consulting work in the future. I've received several "heads-up"'s about top companies reviewing my credit history alongside my resume, and a bankrupcy just isn't going to work. Besides, I don't plan to be poor forever, and honestly would love a chance to repay my creditors (some board members are mad at them - I'm really not. I knew what I was getting into, but life pulled the rug out from under me!) - bankrupcy is a stain that won't go away, whereas a settlement seems to be something I can resolve in the future at the cost of the present. So I drafted a letter, and sent an offer to FirstUSA. They said 1/3 settlement wouldn't work - no explanation. Did the same for MBNA. They said they thought the 36% I offered was reasonable, and would most likely be accepted. I await their decision. Discover is out of the picture for the moment - will wait another 30 days or so. I talked with FirstUSA again today, who said that if MBNA accepts my offer, FUSA will probably do so as well "to remain customer service competitive", and I should fax a copy of MBNA's acceptance letter to them if it indeed works out. However, I was informed by the FirstUSA rep that if I did settle with them, I should know a few things: 1) The amount "charged off" will be reported to the IRS as "my income". I will then have to pay taxes on this! 2) I cannot pay off the debt to FirstUSA. At the time it's charged off/settled, it becomes the sole concern of the IRS. If I want to pay back what I owe in a few years when I regain employment, I will need to pay the IRS and NOT FirstUSA! The IRS will then be responsible for correcting my credit history! Is this stuff correct?! It sounds like if I settle, FirstUSA will NEVER get the $ out of me, only a tax break because of the charge-off, and if I pay, the Fed's get my $, despite never having anything to do with the debt I owed FirstUSA to begin with! Is this true? Is this partly true and I'm missing some details? Lastly, does this sound like a correct move to make - debt settlement? If I really am going to face the Feds instead of FirstUSA, I'll really reconsider other options, because I don't feel it's right for the IRS to receive what is morally due FirstUSA. Thanks Linda, et al. I hope someday I'm knowledgeable enough to contribute alongside you guys.
- Rob
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