You have a long-standing credit card with a balance owing of $10,000. Despite your best efforts to pay down the debt over the years, with interest rates as high as they are, you just don’t seem to be able to make any meaningful progress. Worse yet, the account has been referred to an outside agency for collection, and the harassing phone calls don’t stop. All of a sudden, you receive a letter in the mail from the collection agency:
One-Time Offer to Settle Your Delinquent Credit Card Debt
We will accept three monthly payments of $500 to settle the debt in full!
Contact us NOW to make arrangements. If not accepted within ten days, this offer will be rescinded, and we will proceed to collect the FULL AMOUNT.
Sounds pretty enticing, doesn’t it? Well, like most things in life, there is more to this than you might think, and it is not necessarily for your benefit. Before you jump on an offer like this, consider the following:
1. Tax Implications of Debt Settlement: If you make the three $500 payments as offered, the credit card company will forgive the remaining $8,500. It’s possible that the credit card company will issue you a 1099-C form, and send a copy to the IRS. In some circumstances, the IRS will consider the amount of forgiven debt as taxable income, and you may have to pay tax on that amount. Keep in mind that there are exceptions to this general rule. If you do receive a 1099-C form from a creditor, be sure to consult with a qualified tax advisor to determine whether or not the forgiven debt must be declared as income.
2. Expiration of the Statute of Limitations: In general, the statute of limitationd in Oregon on a credit card debt (a contract claim) is six years from the date of the last payment. If the debt is very old, and you have not made a payment on the account for more than six years, you may want to consider doing nothing. If you are sued on the debt, however, you must file a response to the lawsuit called an “answer”, and raise the statute of limitations as an “affirmative defense”.
3. Renewal of the Statute of Limitations: As noted above, the statute of limitations for credit card debt is six years from the date of the last payment. Let’s assume that you haven’t made a payment for over six years on your account, and then you make the first $500 payment under the settlement offer. The six years then starts over from the date of that payment. If for some reason you default on the offer by not making the second and third $500 payments, the credit card company can sue you for the entire amount owed. You will not be able to assert the statute of limitations as a defense.
4. Depending on Your Circumstances, Bankruptcy May Be a Preferable Option: If you have other pressing debt in addition to the credit card debt, it may not be wise to attempt to settle that debt. Even if you are successful in negotiating a settlement (and there are no tax implications), settlement of that debt may not help your overall situation in that you will be facing pressure from your other creditors. The money that you paid to settle the credit card debt might be better spent in retaining an attorney to file for bankruptcy to discharge all of your debt that the law allows.
This post is intended to be purely informational in nature, and cannot be considered legal advice. If you have questions within respect to issues related to debt settlement and bankruptcy, please call our office at (503) 545-1061 (Oregon cases) or (360) 836-4238 (Washington cases) to schedule a free initial consultation.