Can I offer a settlement to a collection agency over a student loan in default?

Posts Tagged ‘IRS’

Can I offer a settlement to a collection agency over a student loan in default?

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Q: I am at Month 11 of a Student Loan Rehabilitation Program for a Defaulted Loan of About $80,000. I Have Made 10 On Time Monthly Payments of $550. My Parents Will Help Me Offer a Lump Sum Payment to Settle This Debt. I Am Looking at Offering $30,000 to $40,000. The Collection Agency Wants $50,000. What Should I Know To Negotiate a Fair Sum?

A: Frankly, I wasn’t aware that student loan companies or loan servicers were willing at all to “negotiate” lump sum settlements for student loan debts. Frankly, why do they have to, considering the power they wield over debtors? They can report your deliquency to the credit bureaus, they can garnish your wages, they can take tax refund checks, and student loans have no statute of limitations, meaning that creditors can chase you down for this debt until you retire. And even then, they can snatch any pension or social security check you might get. On top of all this, you can’t even wipe out student loans in bankruptcy court. With all this leverage, I’m shocked that some company has entertained the idea of a lump sum settlement.

To be honest, I don’t think you should do a “settlement” because of the many drawbacks to settling a debt. In a nutshell, when you settle a debt, your credit takes a hit, because the obligation gets reported as a settlement or partial payment. Any reporting to the credit bureau that shows you didn’t pay as agreed will lower your credit score. And isn’t that one of the benefits you’re getting from going through loan rehabilitation? Rehabbing a student loan wipes your negative credit history out in terms of past due student loans that were reported to the credit bureaus. Settlements will put some black marks back on your credit records.

Additionally, when you negotiate a settlement with any financial company or government agency, they send you a 1099-C. This reports the amount of debt canceled or forgiven. That “forgiven” amount is considered gross income and is taxable by the government. So if you do get a settlement for, say, $40,000 on that $80,000 in student loan debt, the other $40,000 that is purportedly wiped out in the settlement agreement is taxable at your ordinary income tax rate. If you’re in the 25% rate, that means you’ll be stuck with a $10,000 tax bill.

Finally, I’m just suspect about this whole deal. What recourse would you have if you fork over tens of thousands of dollars to a company and then they say “Sorry, but we never had a deal.” You can reduce this risk, of course, by getting an agreement in writing upfront. But my point is that the student loan company, or collection agency, could probably rightfully show a judge (if it got that far) that you did, in fact, owe $80,000. There’s certainly no law that
requires them to reduce or settle your debt. Then you’d be on the hook for the remaining balance — even after thinking you had a properly agreed-upon “settlement” deal.

I think a better strategy, especially since you have supportive parents, is to let your parents help you make a hefty lump sum payment, but to bite the bullet and pay the $80,000 that you owe. Let’s say you pay $40,000 in a lump sum. All of that money should go toward your principal balance. That will knock out a huge amount of interest charges – more than $15,000 in interest, according to the financial calculator at www.FinAid.org. Visit that site and play around a bit with various loan repayment options. At first glance, it may sound foolish to pay $80,000 when you think you can possibly pay $40,000. But look at it this way: that $40,000 lump sum settlement will really be $55,000, when you factor in taxes. Now take a look at the hit to your credit for the next seven years.

In my opinion it’s worth it to pay the other $25,000 to preserve your credit. If you can keep a good credit rating, you’ll probably save way more than that “extra” $25,000 if you have to get other loans, like a mortgage, credit cards, auto loan or other student loans.

Will I Receive Form 1099-C If I Settle A Debt?

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Author: The Money Coach

Q: Is It True That I Will Be Given a 1099-C When I Settle a Debt for $600 or More Off the Amount That Was Due? If So Exactly What Does This Mean? What is the Tax Percentage I Will Be Charged?
Is There a Tax Penalty Fee For This? And Will This Increase My Taxable Income Therefore Putting Me in a Higher Tax Bracket?

A: Yes, it is true that you will be sent a 1099-C, Cancellation of Debt, when you settle a debt with a creditor and that creditor cancels or forgives a debt you owe of $600 or more.

This means that amount of debt “forgiven” during a settlement will be treated as gross income, and you will have to pay ordinary income taxes on that amount.

For instance, let’s say you had a debt due to a financial company or credit card issuer. The debt you owed was $3,000. However, you negotiated a settlement of $1,000 to be considered as payment in full of your debt. In this case, you will pay $1,000, and the other $2,000 owed will be considered the amount of your debt that was “canceled” or “forgiven.” You will then get a 1099-C. Box 2 of the 1099-C will list $2,000. That is the amount on which you’ll have to pay taxes.

There is no “penalty” per se on 1099 income. It’s merely that you have to pay ordinary income tax on this money. The exact tax percentage depends on your own tax rate. As of 2010, the current tax rates in the U.S. are: 10%, 15%, 25%, 28%, 33% and 35%. Also, depending on how much debt you have had forgiven and where your income falls, yes, it is possible that forgiven or canceled debt can push you into a higher tax bracket.

Check out IRS Publication 4681, Canceled Debts, for more information. Also, look at Topic 431 – Canceled Debt – Is It Taxable or Not? You can find both documents online at www.IRS.gov.

IRS Has $1.3 Billion in Unclaimed Tax Refunds for People Who Didn’t File Tax Returns

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Author: The Money Coach

If you haven’t filed a tax return in years, the Internal Revenue Service wants you – and not in the way that you think.

The IRS is actually looking to return $1.3 billion in unclaimed refunds to roughly 1.4 million people who never filed a federal income tax return for 2006. If you happen to be among those non-filers, you must act fast because to collect any money you are owed, a tax return for 2006 must be filed by April 15, 2010. Under the law, you only have 3 years to claim a tax refund; after three years, any money that would have been due to you becomes the property of the U.S. Treasury.

Lots of people don’t file tax returns for a host of reasons. Some people earned too little money, and weren’t required to file. They may nevertheless be entitled to a refund, based on taxes paid or tax credits for which they were eligible. At other times, however, people don’t file a return simply because they owe money – or they’re scared that they may owe money. Even if you owe the IRS, chances are you can work out a payment plan to clear up past-due payments. If you didn’t owe money, and didn’t file a 2006 tax return, you don’t have to worry about penalties because penalties are only imposed on individuals who had taxes due.

According to IRS statistics, the typical unclaimed refund for 2006 is $604.

The states with the highest numbers of non-filers who have a 2006 tax refund waiting for them are: California (159,800 individuals); Texas (109,600 individuals); Florida (101,700 individuals); and New York (76,700 individuals).

What’s more, many people who didn’t file their taxes a few years ago may stand to gain even bigger refunds if they made less than approximately $38,000 in 2006 and claim the Earned Income Tax Credit.

For more information about getting an unclaimed refund, check out more on this IRS video in English or Spanish.

How long do I need to keep my business tax records?

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Author: The Money Coach

Q: In the May 2008 Issue of Health Magazine, Your Article Said You Only Need to Keep Your Tax Records Three years After Filing a Tax Return. My Understanding Was That the IRS Could File Up to Six Years Later. I Have a Small Business and Have Been Keeping My Records Six Years. What is the Current Ruling for This?

A: Under section 6501(a) of the Internal Revenue Code, the IRS is required to assess tax within three years after a tax return is filed. Therefore, most people need only keep tax records for three years after filing a tax return, because that is the time period during which:
a) a taxpayer can amend a tax return to claim a credit or refund; or
b) the IRS can assess additional tax

As you are self-employed, however, there are a few circumstances in which you should keep records longer. Keep employment-related tax records for at least 4 years. Also, if you ever under-report income by 25% or more of the gross amount shown on your tax return, then you should keep records for at least six years after you file a return. In such as case, the IRS has six years to assess taxes – not just three. What’s more you should keep tax records indefinitely if you file a fraudulent return, or if you do not file a return at all. But I assume that these last two scenarios don’t apply to you.

According to the IRS, “the exact length of time you should keep a document depends on the action, expense or event the document records.”

The IRS further offers this guidance:

1.   You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.
2.   You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.
3.   You file a fraudulent return; keep records indefinitely.
4.   You do not file a return; keep records indefinitely.
5.   You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.
6.   You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.
7.   Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

Here’s the direct link to exact page on the IRS’s website that answers the question: How long should I keep records? http://www.irs.gov/businesses/small/article/0,,id=98513,00.html

Will Accepting a Settlement Offer From a Credit Card Company Affect Your Credit Score?

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Author: The Money Coach

Accepting a settlement offer from a credit card company will negatively impact your credit rating and lower your credit scores. The reason for this is that when a settlement occurs, a creditor has agreed to accept less than the full amount of money owed to it – even though the creditor, internally, will consider the balance as paid. Externally, however, two potentially harmful things occur for the consumer. First, the creditors immediately reports to the credit bureaus that your account was “Settled” “Settled for Less Than Owed,” or “Paid by Settlement” – all of which tarnishes your credit records with Equifax, Experian and TransUnion. Additionally, any amounts “forgiven” during a settlement are usually reported to the IRS. When this occurs, the IRS considers monies “saved” during a settlement to be income. Therefore, you also therefore have to pay income taxes on the amount of money you “saved” during a settlement.

Check the “Status” Notations In Your Credit Files

If you have “settled” any accounts over the past seven years, through direct negotiation with creditors – or perhaps as a result of using a debt settlement company – you should check your credit files to see how those settlements were reported. One of the most important sections of your credit report is the “Status” references to whether you’ve paid your debts on time, or whether you’ve been late – and if so, how late. Upon examining the “Account Summary” area of your credit report, that is where you will find “Status” notations.

Your payment history is shown on your credit reports as your “Account Status,” “Current Status,” “Pay Status” or just simply “Status.” Open accounts with no delinquencies will have these types of “Status” comments: “Pays as Agreed,” “Never Late,” or “Current.” Closed accounts with a positive credit history will be noted as “Paid As Agreed,” or “Pays As Agrees.” Negative information will most commonly be stated as 30, 60, 90 or 120-day late payments. Other negative comments include: “Collections,” “Settled,” or references such as “Paid, Was 60 Days Late”. If an account has been “charged off” or written off by a creditor as uncollectable, that fact will be noted too, typically along with the dollar amount charged off.

In short, any notation in your credit file that indicates that you did not pay your debts exactly as originally agreed will be viewed negatively by credit-scoring firms, and potential lenders.

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Posts Tagged ‘IRS’