If you have a defaulted debt of say 20,000 and the company offers to settle it for 4000..........

They fill out a 1099 showing you made 16000 and send a copy to the IRS so you have to pay tax as if you had EARNED 16000.

This is a travesty. The income tax was originally to be only on wages and capital gains I think were added later. Because a debt is forgiven is in no way INCOME.

Just one more way the gov and banks want to screw us over.
The bankruptcy law was changed to the benefit of the banks and in my opinion does not comply with the Constitutional definitions any more with the conditions they placed on it under the revised bank favorable law.

 

Okay, so a bank gives me 16,000 dollars worth of stuff. I only have to pay a bit of tax on it like it's income and the bank is screwing me?

Maybe people should learn to budget and take responsibility for their spending. I have a lot of credit card debt as part of my small business. I make minimum monthly payments and i'll pay it off one day when things are a bit better. I expect no handout. I'm a grown person and reaped the benefits of charging up all that stuff, now I have to pay it off. I wouldn't even feel right about settling for pennies on the dollar. I spent it, i'll pay it back.

edit - we don't have many charge offs but generally when I settle an account for less with a customer in court I don't say to myself "wow he owed me 5 grand but I got 1, he got screwed" instead I think "fuck, I got worked again and I still have bills to pay"

 

as someone who has defaulted a few times...this is not true.

 

Yes, it is true; and yes, it is money you have that you didn't have before. It's not the bank's fault that you spent it already. The income tax is not just a "Wage tax." We have to get this notion out of our heads if we want a fair taxation system.

 

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First off, if you don't spend way more than you make, you won't have to think about settling. Just because the Jone's are in debt over their eyeball's, don't mean you have to be also.
Be a respondsable person

 

From someone who has been there in a slightly different way, I understand completely though if you talk to a tax consultant you may find a way to minimize the damage.

 

Yes, I am going to put my 2 cents worth in on this one. Unfortunately, I have entirely too much first hand knowledge of this.

Before you say that the bank is -not- screwing you over, think of this:

The average percentage rate on cards today is about 25%. That means for every $100 I spend, the balance will be $125 the first month, then $156.25 the next month even though I have not charged one single cent on the card. This amount will continue to go up every single month by 25%. Even though I may be paying the payments each month, most companies only require a minimum payment of 3% of the total balance, which means that the company is still tacking on 22% of the total balance every month. A lot of people mistakenly think the balance only goes up by X% of the original balance, but that is not true. Read the fine print. It is the X% of that month's balance, which goes up every month when they tack on those revolving percentage charges. Anyone with a 5th grade education who bothers to sit down and do the math can see that this $100 charge becomes $891.36 after only 12 months, without ANY additional charges, and when paying the minimum 3% on the balance would have paid $134.66 which is MORE than the original charged balance of $100. And if you settled this debt for 40% of the current balance you will have spent an additional $356.54 on top of the $134.66 for a total of $491.20 on an original charge of only $100. And you think this is fair??

Now imagine if you had charged $1k and paid minimum balance for 12 months. The bottom line is that you are paying back WAY more than you actually charged in the first place. Last time I checked that was called 'getting screwed' and anyone who bothers to sit down and do the math will realize that. It's one thing to pay back what you owe, but when you have to pay back 10X or more of what the original purchase price is, that's when the bank is sticking it to you. And this does not even take into consideration any over-the-limit fees or late fees that may be added. The whole point of the credit card reform was to keep banks from screwing people over like this. Not that the reform is doing a whole lot, but I guess it's the thought that counts.

Now also keep in mind that if you settle a debt or just default on it all together, the credit card company gets to write this off on their taxes. So on top of them getting 10X more money out of you than what you owed, they can now write off a portion of that debt and get even more money.

So the question, I would think, is how anyone with half a brain and a remotely decent education can look at these numbers and think it's "fair" that the credit card companies get to screw working folks out of hard earned money. And then when people are forced to settle a debt, they have to pay taxes on money they didn't actually earn, taxes on money that the credit card company got to write off, and all this AFTER the individual had already paid back 10X or more of the original debt.

If anyone doesn't believe me, I'll issue this challenge: open up a new credit card account and make ONE charge on it, only make the minimum payments and see what the balance looks like each month. (using a card with a 0% introductory APR does not count!) I'm thinking you will be very shocked to see that balance skyrocket after about 4 to 6 months. Unfortunately, most people don't ever stop charging on their cards or keep up with how much money they actually spent to realize just how out of control these companies are getting. I had to learn the hard way.

Now for even more bad news. Ever hear of "zombie debt?" This is when a credit card company takes the debt it has already settled or written off and then sells it to another company, usually a collection agency. These agencies then try to collect on a debt that has already either been settled, paid in full, or written off by the original issuer. These companies will even go so far as to sue the debtor. It's not legal and you can counter sue the companies, but most people don't keep up with their spending enough to even realize what is a legitimate claim and what isn't, so they either pay it get judgements against them. The good news is that more and more people are sueing these companies and the credit card companies and are actually winning their cases. It's just disgusting what these companies are doing to ruin people who are out there working their butts off trying to provide for their family. Sure, there are lots of people who are abusing credit cards and spend it on designer clothes and the like, but the majority of these people are family oriented folks who were forced to live off their credit cards at some point because they lost their jobs. As I said, it's disgusting and something should be done about it.

 

This nonsense is a prime example of why people get themselves into financial trouble. Basic math skills are a must in life. The average percentage rate is closer to 25% PER ANNUM, NOT MONTH. That is roughly 2% per month. subtract about 20 some bucks off of your interest calculations and you'll have the actual interest in real life.

 

You lose your job due to discrimination which was illegal, and then find out that because of your age, none of your experience or education counts any more, and then see how your credit card debt stands after 2 years of trying to keep everyone paid while hoping for a job for one of the 200 applications you filed.

Why does age matter? The insurance companies carrying group policies for corporations do not want them to hire anyone over 45. Just wait till you get there, I know people in their 20 and 30's don't believe this, but its true.

I'm not the only person I know that has run into this barrier.

 

Simply put credit cards are a dumb way to get credit. For managing cash flow they are great, but not credit. I always like to think of credit and interest as paying someone to save for you because you do not the discipline to do so.

Sure there are emergencies, but most people use them for holidays, Christmas shopping, etc. Then they pay the minimum amount. Shit happens and suddenly it is out of control.

Of course the interest rate is a rip off. Read the terms and conditions - it is part of being an adult!

And of course the tax man is going to bite. What a perfect loop hole - lend an employee some money and then write it off but just don't call it income and he never pays tax. Come on!

Grow up.

 

That's true in a lot of cases but credit cards can be a good way of credit you have a good score, it's just that most people don't. All of my cards, except for one, have a similiar interest rate to what an unsecured loan at the bank would be and they are easy to keep around. I know a few well established business owners that pay even less interest on theirs than what a bank would charge. My highest card is 14%, the others are less than that by quite a bit.

 

The $16k IS INCOME by default. Period.

The creditor availed themselves of the benefits that the cc company extended credit for. This was granted in lieu of cash payment by the card holder. Whether the amount was for goods, services or accrued interest on the debt, it was known by the creditor upfront.

No one forced the creditor to avail themselves of the credit available, so it is rather hollow to bitch about it afterward.

 

If you listen to Dave Ramsey you will hear what he has to say about this. In our society people are seen as some kind of weird if they don't have a credit card. Two years ago I went through one of Dave's Financial Peace University courses, I wish I had done it when I was 20, if I would have listened. In two years time I have wiped out my debt almost entirely with only my home being the remaining bill and I owe $4000 on it, that will be paid off before the year is out. I don't use credit cards and I refuse to pay retail for anything. I am not wealthy by any means but I have more cash free from debt than I ever have.

It is never too late to begin down this path, it is no magic formula and most is common sense, but it required sticking to my budget to get clear.

 

I havent used any kind of credit in the last 15 years,i also listen to Ramsey and i make my 15 year old daughter listen to his show.I look at it this way, if i cant pay for it then and there i cant afford it/Master Chief

 

Lanie, this is an identical situation to defaulting on your home loan.

You let the bank take back your home. For whatever reason, i.e. balloon payments are too high, etc. The house is resold. If the house dosen't bring as much as is owed; you will recieve the 1099 just as if you earned the money. You have to declare it on your next tax filing.

Using real property as an example can help put it in prospective.

On another note: Yes, I'm over 45 with a medical condition. My prospects for positive employment get slimmer each day.

I've seriously considered jacking up banks for a living. A modern version of some good old fashioned fun ala Bonnie & Clyde and John Dillenger style may put a new perspective on things.

A gent

 

Zimbo's law of credit;

Never take out credit for anything unless you know you will still be happy with your purchase when you make the final payment.

Thus houses, cars, etc. are good.

Groceries, holidays, etc. are bad.

 

How about boob jobs?