a.k.a. Debt Negotiation or Debt Consolidation

Occasionally, despite being a law office which focuses on bankruptcy, it is nonetheless appropriate for the King Law Center to engage directly in debt settlement discussions with credit card companies or other creditors. Our approach is to “posture” that you, the debtor, intend to file a bankruptcy but, if the creditor can agree to a significant reduction in balance due, the bankruptcy filing can be avoided altogether.

While each situation is different, some factors which might make it appropriate to attempt to settle a debt are:

• The bulk of the debt is owed to one (or maybe two) creditors
• You cannot “qualify” for Chapter 7 bankruptcy (if, for instance, your income exceeds the means test guidelines)
• You do not want to be tied into a mandatory monthly payment in a Chapter 13
• You are not eligible for a discharge (such as where a discharge was granted in a prior bankruptcy)
• You have assets in excess of the exemption limits

Often times, the creditor may agree to cancel greater than half the balance owed; and if the debt has been sold into “collections,” the collections agency will often take a quarter (25%) of the original amount owed. These numbers vary, of course, and the amount you may be willing to pay will also fluctuate based upon a number of additional factors, but a big reduction in principal can be a significant victory for you.

It is imperative to keep in mind, however, that any debt cancelled as part of a settlement may be considered income. In fact, you can expect the creditor to mail you IRS Form 1099-C (Cancellation of Debt) no later than the end of the year in which the debt was reduced. What this means is that if you owed $10,000 to a credit card company and they agree to accept a lump sum payment of $3000, you will have an additional $7000 in taxable income which much be accounted for in your annual tax filing (IRS Form 1040, 1040A, or 1040EZ). As a simple illustration, consider that a 15% federal tax applied to $7000 is $1050. Ultimately, then, in this example, you will actually pay $4050 to eradicate the $10,000, not just the $3000 agreed to.

While the numbers are still on your side, remember that a bankruptcy will have no Cancellation of Debt consequences. This is true even if you elect to return a home, car, or other secured property to the lender as part of your bankruptcy.

In the end, the decision to seek debt settlement rather than file a bankruptcy is a product of many variables. Sometimes you do not actually intend to file the bankruptcy; in this case, having a bankruptcy attorney represent you, without revealing that you do not intend to file a case, can promote the settlement beyond what you might be able to do alone. If you can file a bankruptcy – and are willing to do so – you have a tremendous amount of leverage in the settlement negotiations. Since the typical Chapter 7 bankruptcy is a “no asset” case and the lender will, accordingly, get nothing if you file, anything you offer is better than they will otherwise get. Threatening a lender that you will file bankruptcy if they do not agree to your terms is going to also be a lot stronger if you do so having already retained a bankruptcy attorney. This is because they simply might not believe you. At that point, “calling your bluff” might just cost the lender a chance to get paid altogether. Some debtors who are averse to the concept of bankruptcy will find that a reasonable request to a lender which goes unaccepted removes any moral impediment they might have since the creditor who says no to a good faith, reasonable offer can be seen as overbearing, bureaucratic, or even mean.

[NOTE: “Debt Consolidation” is sometimes considered an offshoot of Debt Settlement, but this is erroneous. “Debt Consolidation” is the grouping of debts into one lump, monthly payment, presumably with a benefit to the debtor, such as a reduction in principal or a waiver of interest fees. Debt Consolidation, therefore, effectively mirrors Chapter 13 (monthly payments) but without the legal protections afforded by the bankruptcy code. King Law Center accordingly does not engage in Debt Consolidation work since our intent is to best serve the debtor, and undertaking an agreement which mirrors Chapter 13 but leaves out the protections of the law, does not match our mission nor, in our opinion, serve the best interest of you, the debtor.]