When you fall behind in payments of unsecured debt (charge card, credit card or medical debt) creditors and third party debt collectors work hard to get the money out of you. In doing this, they may offer term negotiation, debt settlement, or law suits with judgments and wage garnishment. It is difficult to predict which method a creditor will choose in a given circumstance, even for a bankruptcy attorney. Several variables and business policies lead the creditors in their decision-making.
The debt settlement offer is a tactic that creditors often use in attempting to relinquish debt. Perhaps you owe around $15,000 on your credit card and it went into default. The debt collecting employees or the company itself will contact you in an effort to get the entire $15,000 paid in full. Of course, though, if you would have had the full lump sum, you would have been able to pay the minimum payments and would not have gone into debt in the first place. But, they request that you pay anyway. You cannot pay. The company or its collectors continue to call you frequently and become quite hostile and harassing. Although, after some time passes and they realize you aren’t going to pay the full amount, you are most likely offered the chance to pay a mere fraction of the debt you owe. This typically occurs at the end of the month as the collector is working to reach his or her quota. This may be an extremely enticing offer. They may offer you 70% or 80% off of the total owed, but you still do not have the money.
You reject these early offers and soon after similar lower offers, if there is no apparent plan to sue you, get a judgment and garnish your wages, they could potentially come down to a mere 15%. This seems great because you could pay $2,250 to get rid of $15,000 of credit card debt. This appears to mean huge savings because the creditor will finally leave you alone. You might pawn or sell something, borrow money, make a loan against the equity of your home or the title of your car, or even take out a loan from your IRA or 401 (k) plan. However you do it, you come up with the money and pay it to the creditor.
Unfortunately, this is where things only get worse. Aside from the errors made in your attempts at getting the money, you also defaulted on a legal contract. So, the company accepts the $2,250 but the contract still holds that you owe $15,000. Behind the scenes, most of these companies are selling the remaining balance to third party collectors for just pennies on the dollar. Next, the new collector waits, perhaps for years, assigns the account new numbers and a new date and forwards it to credit rating companies. After a while, a new collector now demands the $12,500 due under your contract, and begins harassing you. You realize this debt is stemming from the debt you thought you already settled and you raise that point. Unfortunately, you still legally owe the $12,500 and the new collectors will start the entire negotiation process over. Doing so adds more contractual collection costs, late fees, penalties, and interest. So depending on how much time goes by and how well you make your payments, you could end up owing far more than the original $15,000. This conundrum is what bankruptcy lawyers refer to as Zombie Debt.
What if the outcome of this scenario does not happen to you? Well, regardless, what happens by law is that you still only paid a fraction of the $15,000 that you legally and contractually owed. The creditor who struck the deal with you forgot to mention that next year debt forgiveness 1099 will come to you from the creditor, which is noted by the IRS. Thus, according to the IRS, you have $12,500 additional income that you are now going to be taxed on. This is again another uncomfortable situation as these additional taxes now have to be paid and this is likely from money you do not have. There is a possibility that if you are an insolvent you can get out of this through an IRS form 982. However, you are still in an economic hard place.
Debt settlement is rapidly changing and it is important that before you make any decisions on how to handle debt of any kind you contact a zombie debt lawyer to learn your rights. Don’t let big companies, collectors, or third party agencies scare you into making a huge mistake. Contact experienced zombie debt attorney Chris Dixon today at 314.409.7060 to learn your rights in a terrifying situation such as this one.