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Personal Finances / Credit Cards and Consumer Debt


Subject:  Re: Debt Settlement - Danger? Date:  8/30/2012  8:03 AM
Author:  aj485 Number:  305841 of 312949

I owed a credit card company $16,381. The credit card company’s collection
agency sent me a letter confirming that “…it is duly authorized to accept $6,825 in full settlement of the debt”, provided that my payment reached the collection agency’s office within a week. Earlier today, so as to comply with the deadline, I sent a $6,825 check by mail to the credit card collection agency.

Well, there are lots of questions that I would have about if this really is the "credit card's collection agency" or if your debt got sold to the collection agency. But those are questions that should have been asked before you sent the check off, so the questions aren't really relevant now. There are also questions about how the original account and the collection account will be reported on your credit history, but since you already sent the check, you've lost any leverage that you might have had there. For lurkers, or if you want to settle any other debts, I would suggest getting questions like those answered BEFORE you send any checks. If you don't want to come here to ask the questions, you can try looking for information on debt collection and credit reporting on, or, among others.

You probably do need to keep the records of this entire transaction (the offer from the company, the fact that you sent a check and they cashed it, etc.) forever. The debt collector may try to make some additional money by selling the other $9556 of your debt to another debt collector, and you need proof that this transaction was supposed to satisfy the debt. In a few months, you should also check to make sure that the debt is reported as settled on your credit reports, unless you made some agreement with the collection agency (hopefully in writing) that it would be dropped completely - then you should check for that.

I would also caution you that the $9556 differential between what you owed and what you paid is considered income to you, and you are likely to get a 1099 that you will have to include in your income when filling out your 2012 taxes, unless you can show that you were insolvent at the time that you settled the debt. (You didn't say how you got the money to pay off the debt, but if you didn't have to get it from someone else, you probably weren't insolvent.) If you are in the 25% tax bracket, you will end up owing an addiitonal ~$2389 in taxes than you otherwise would have, so either your refund will be that much lower, or you will have to pay that much more to the IRS. And if your state collects income tax, you will probably owe them some additional money, too.

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