HELP!!! - BK13 or Debt settlement???

[justplaintired]

The primary difference between chapter 13 and debt settlement comes down to this question

Do you want to control your creditors, or do you want your creditors to control you.

If you file chapter 13, you are in control of the situation.
If you go with debt settlement, you are at the whim of your creditors.

I am so glad you stepped in. I do believe another poster said that you get a 1099 for the difference and you will be required to include those figures in your tax returns. Many other threads on this forum have stated the same thing, so please be sure to ask those debt settlement co about this too.

All my research on debt settlement seemed to say the same thing, even a debt collector we spoke with advised against it and told us BK is a better route. She informed me that she had dealt with so many sad stories of people who went the debt settlement route. This women by the way had nothing to gain or lose by telling me this, we had already decided on BK and she said we made the right decision.

[HHM]

Strictly speaking, when a lender forgives any debt over the amount of $600, they are required by the IRS to issue a 1099. Now, whether the lender actually will is another question (collection agencies are hit or miss when it comes to 1099's, but original lenders tend to be more consistent about issuing 1099's).

But yes, forgiven debt is considered reportable income by the IRS, however, if at the time the debt was forgiven you are insolvent, you can except that forgiven debt from your income (see IRS form 982).

The problem with debt settlement, too many people feel it is an alternative to BK, it really isn't. The best candidates for debt settlement are those persons who CANNOT file for BK for whatever reason. (to wealthy, filed to recently, etc).

[Frogge]

And I will add this..

My original idea about the debt settlement route was that I would be better off from a credit standpoint - I wouldn't have a BK on my credit report so I would be 'better off'. This is totally inaccurate.

[parsoc48]

I too thought debt settlement would be the answer....it wasn't! Yes, Target settled (for 65%) and BoA willing to settle for $3,000 on $10,000 debt but Chase's lawsuit was looming so we "gave up" and decided on BK. Debt settlement will not stop lawsuits, will not stop creditors from calling, and will not look any better on your credit report. The one we had (American Financial Services) was professional and available and did not try to hide their terms or the risk of lawsuits, but nevertheless it was expensive (high fees, 3 mos. paid upfront and not into our "account") and was taking too long to make much progress. We were in it from 5/07 until 2/08 when we retained our attorney.
I'm sorry I didn't find this site sooner, or take a harder look at BK as an option...we could have been almost a year into our 13 plan instead of 2 months!

[screwedupbyRE]

HHM said it well.

I also though of going with debt settlement comapny, but if you read the fine prints of their contract, you'll stop this though process right away.

In fact you could handle it by yourself (not easy though). I started getting calls from collection agencies and got two offers, they are approx 25-35 cents for a dollar, and willing to negotite further. They freak out when you tell them you are filing for chapter 7 (not 13). That opens room for better negotiation. Citibank is open to talk if I want... I'm thinking about 10-15 cents for a $, and I don't mind 1099.

You might want to consider craming down (lien strip) the second loan if it was used towards the purchase of house. Talk to your attorny abt it.

good luck.

[treehugger1]

Keep in mind that under the IRS regulations, a 1099 for debt reduction may or may not be taxable. There is an entire slant to this based on the definition of insolvency at the time the debt forgivness was agreed upon. I would guess that it is much harder to argue insolvency when you have assets that could be converted to cash. But, I don't think one should assume a 1099 implies you are liable for taxes. It is only a reporting method used to inform the IRS. I'd speak with a CPA who has experience in this area.