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M. Cabrera & Associates, PC

One Executive Blvd. Suite 201
Suffern, NY 10901

Credit Card Company or Bank Lawsuits.

Beware of Paid Debt Settlement Companies

A debt settlement company does not make monthly payments on the debtor's accounts and they still remain in default. While the debts are still in default the creditor or its assignee can still file a lawsuit against a debtor. Most creditors

Debtors can still be sued

Settlement damages credit

There are five main objections to consumer debt settlement: damages credit, increased collection calls, possibility of lawsuits, tax consequences and the need to settle with all creditors.

and debt collectors want a lump sum payment to settle for less than the full debt. Although a debtor may make monthly payments to the debt settlement company, the amount is too small to successfully negotiate a settlement until after the debtor has made several months' worth of payments.

Tax Consequences

Another common objection to debt settlement is that debtors whose debts are partially canceled outside the bankruptcy system will need to report the canceled portion of the debt as taxable income. (IRS Publication 908)

The Internal Revenue Service considers $600 or more of forgiven debt as taxable income. The forgiving creditor must provide the taxpayer with a 1099-C tax form. This form will list the amount of forgiven debt and interest in Box 2. Taxpayers with portions of personal loans forgiven may not subtract the interest reported in Box 3 from the amount of reportable income on this form.

However, the IRS does not require taxpayers to report forgiven debt if the tax payer was insolvent at the time the creditor forgave the debt. Being insolvent means that the amount of a debtor’s debts are greater than his/her assets (how much money and property the debtor owns). However, the IRS adds that “you cannot exclude any amount of canceled debt that is more than the amount by which you are insolvent.”[5]

For example, if a taxpayer is $10,000 in debt and owns $3,000 in assets, he/she cannot exclude more than $7,000 of forgiven debt from his/her income tax. Any forgiven debt over $7,000 that year must be reported as taxable income.

Negotiating with Creditors

In some cases, a creditor may be open to negotiation to reduce the amount of the debt or in some way alter the terms of its repayment to make it less burdensome to the debtor.

Why would a creditor do this? Mostly because he wants to get paid and turn his attention elsewhere – as the old adage goes, half a loaf is better than none. A creditor may make the analysis that the time invested in pursuing the debt isn’t worth it and thus may be interested in negotiating a settlement. This is especially true where the creditor becomes convinced that he may face real resistance should he attempt to enforce the debt through litigation.

These kinds of negotiations aren’t something lay people generally want to do on their own. Negotiations can be complex, and you have to know what to ask for, what’s reasonable to expect, and how to approach the subject. Negotiating settlements is a core part of the services M. Cabrera & Associates, PC offers. Contact us so we can discuss your case and whether negotiations are in order.

Every situation is individual, of course, but there are certain principles that generally apply:

Cash is king – If you have cash that can be put towards paying off part of the debt, the creditor may be interested in negotiating with you since that increases the likelihood of his being paid sooner rather than later.
Imperfect information – If you can demonstrate that the creditor’s information about you and the debt in question contains mistakes or is incomplete. You can increase the chance the creditor will be open to a settlement. Flaws in his information weaken his case should the matter go to court; therefore he is more likely to want to negotiate a settlement.
Age of the debt – As a general rule, the older the debt, the harder it is to collect, since the passage of time tends to make it more difficult for the collector to make his case and because debts eventually become too old to enforce in Court under the relevant statute of limitations.

You are free to negotiate with a creditor, but it is often wise to have a lawyer help you do so.

Essentially, the debt settlement company negotiates upon the borrowers’ behalf with creditors to reduce the overall debts in exchange for an agreement upon regular payments to be made. For the debtor, this makes obvious sense – they avoid the stigma and intrusive court-mandated controls of bankruptcy while still lowering, sometimes by more than 50%, their debt balances. Whereas, for the creditor, they regain trust that the borrower intends to pay back what he can of the loans and not file bankruptcy (in which case, the creditor risks losing all monies owed).

There are obvious drawbacks – credit reports will show evidence of debt settlements and the associated FICO scores will be lowered as a result. There’s always the possibility of lawsuit whenever the debt remains unpaid. The longer the creditor is left without full payment the more likely they are to file a lawsuit. If a lawsuit is filed, regardless of whether or not you are paying the settlement company, THE LAWSUIT MUST BE ANSWERED OR RESPONDED TO. Within the majority of the agreements signed with debt settlement companies there are clauses that advise the debtor that the debt settlement has NO responsibility or obligation to answer or respond on your behalf. Even though you have paid money to this company, that they have not released to the creditor, which you may have a hard time getting back, you now need to defend a lawsuit which may cost you even more money.

Common objections to settlement

The debt settlement damages the scores in credit report. A credit report is used by creditors to judge past credit performance to see if the applicant satisfies their criteria for lending. Insurance companies uses a person's credit report to determine premiums and prospective employers review the credit report to establish the character of a job candidate. Settlement arrangements that do not consider the status of the settled debt for credit reporting purposes are a disservice to the debtor. When using the firm to settle debts this important aspect is part of the negotiation.

Will negotiations work in your case?