Debt settlement is a controversial technique to pay less than what you owe. Read this recent email exchange between me and the owner of a debt settlement company and you'll see what I mean.
If you’ve got more bills than you can pay, perhaps you’ve considered debt settlement. It’s a process that allows you to completely satisfy a debt by putting up only a partial payment. For example, if you owe $5,000 on a credit card, you might offer to settle the debt with a lump sum of only $3,000. You can do it on your own simply by calling the bank and making an offer, or you can hire help, like a lawyer or other professional who will negotiate on your behalf.
But when it comes to debt settlement, the problem is obvious: If you don’t have the money to pay your bills, how can you get the money together to offer a lump sum to your creditor? The answer for some is to turn to one of the many heavily advertised debt settlement companies. These companies urge you to stop making payments on your debts and send them the money instead. Once you’ve accumulated enough, they use that money to settle the debt with your creditor.
I’ve done a few posts this year about debt settlement:
- Imprisoned by Debt: 5 Escape Plans
- Should You Consider Debt Settlement?
- If I Settle a Debt, Do I Have to Pay Taxes?
None of these articles are super-supportive, and some in the debt settlement business have apparently taken both notice and offense. Here’s an email I recently received. It’s printed in its entirety, errors and all. I’ve omitted only the person’s name and the name of their company.
What happens when amateurs give advise about debt? they give the wrong and misleading information. This is what you have done with the question about creating a debt settlement agreement and forgiveness of debt and the debtor gets a 1099 from the bank who settled with the card holder.
The writer and you completely ignore the fact that the IRS has provided for an exception and exemption when the debtor is in fact insolvent.
Simply put to make it real easy for people to understand, to the extent that the debtor is insolvent…debt less net assets, the IRS says no tax until the amount of debt forgiven equals the insolvency.
Let us suppose that one owes $50,000 in debt which is settled for $20,000 saving the debtor $30,000 over the life of a debt settlement program. and by the way, there are legitimate debt settlement companies in existence that do a fine job. (His company) just happens to be one.
Now…as each debt is settled, the debtor gets a 1099. The tax accountant simply prepares a sheet and uses and IRS form to show the IRS what the insolvency was at the time of the settlement and to the extent that the amount forgiven is less than the insolvency, there is no tax.
We at (Company Name) have a complete package we send our clients explaining the entire debt forgiveness and tax issue when it becomes an issue. It is designed for the debtor to use or give to his accountant to make it very simple to avoid the tax. I said avoid, not evade. Some banks do not send the 1099 and it is then not an issue. Others do.Naturally, having pointed out how you, like other so called experts mislead the public, it is doubtful you will in fact present the actual truth. It is a shame you have an audience to mislead.
I am (Person’s Name), President of (Company Name). I literally launched third party debt settlement as an industry in 1989. Most legitimate people in our industry consider me the very best at what we do. I teach it and lecture and do my best to keep the hacks and cheaters out of our industry and then, along come people like you who are totally misinformed and fail to get the information correct and to make it worse, you publish articles like the one I just read and use the misinformation to damn the industry. Shame on yo
For your further info I am on face book at (facebook page) At least we try and get the right information out there for people to read and understand. what are you doing but misleading and the article about debt forgiveness and not telling people that there is a way out of the tax is a fraud on your part.
Here is the response I sent this person, also printed in it’s entirety.
Dear Mr. ______
A fraud on my part? That’s pretty strong language. While I’m not sure exactly which post you read or video you watched, I doubt very much that I said anything incorrect, much less fraudulent. What I’ve said in my posts is true in my experience: I’ve yet to read an email from any viewer or talk personally to a debt settlement client that was aware of the potential income tax implications of debt settlement.
And while being nothing more than an “amateur,” I have in fact written about using insolvency to avoid tax from debt forgiveness, even linking to IRS form 982: you’ll find that post here. And this relief obviously doesn’t apply to every single person who settles a debt, something you must know but don’t mention. You also say “Some banks do not send the 1099 and it is then not an issue.” That’s untrue. The fact that nothing is reported to the IRS doesn’t render an event non-taxable.
As for your calling me an amateur: while I may not be a professional in debt settlement, I’ve been doing consumer news for 19 years and have been a CPA for 29. So I don’t think I qualify as an amateur, Mr. _____. Unless, of course, your definition of “amateur” is someone who happens to express an opinion that doesn’t agree with yours.
More to the point, if you’ve been doing your best to keep “hacks and cheaters” out of the industry you created, you’ve done a bad job. The truth is the debt settlement industry is rife with sleazy operators and high pressure sales people who don’t adequately serve their clients, disclose their fees or explain the potential income tax implications of debt settlement. And writing a patronizing email doesn’t change my personal experiences, consumer complaints or government hearings that support that conclusion. Here’s one example: results of an FTC workshop regarding the for-profit debt settlement industry.
On another topic, I’ll close with this thought: opinions certainly create a wonderful opportunity for disagreement and further discussion that can ultimately change one’s point of view. I welcome that kind of exchange. But belittling people, using a condescending tone or otherwise trying bully those who disagree with you is no way to communicate, Mr. _____. It’s childish, silly, and in the end certainly won’t make me or anyone else with whom I choose to share your correspondence feel better about you, your company or your industry.
I’m printing this email exchange for several reasons… First, to present opposing points of view; I think that’s important when opinions are presented, and I often present mine. Second, to again highlight the pluses and minuses of debt settlement as a debt-destruction technique. And third, as a soapbox to talk about what I believe has become an epidemic in this county: using half-truths and abusive rants against those with whom we disagree rather than employing polite, reasoned persuasion.
People haven’t always talked to each other this way. I think I may understand where this new attitude of abuse comes from: the many cable news and talk radio shows that employ specious arguments and scorched-earth rhetoric to belittle rather than persuade.
In my opinion, it’s time we all recognize that these shows aren’t about reasoned discussion or changing opinions: they’re about money.
Whether it’s Bill Mahr or Fox News, the game plan is to pander to people’s prejudices, polarize them, make them loyal… then sell them stuff. It’s a stupid trick that’s resulted in producers getting rich, created a needlessly divided and ill-informed public, and put our nation in grid-lock.
Bottom line? If you want to change opinions, think about what you’re saying. Use common sense. Have some manners. Otherwise all you’re doing is coming across as pathetic rather than persuasive.