What debt collectors don't tell you.

While it isn't their job to educate the public there is one rather nasty little surprise that debt collectors don't tell you about. If you settle the debt for less they can and quite often do report the unpaid balance to the IRS via the 1099 form and especially if the difference between what you originally owed and what you settled for is large, over $600. Then you can be required to pay the tax on the the difference they reported. If you don't report it and pay the tax on the "income" then you incur the possibility of getting into deep problems with the IRS. But they never tell you any of that but usually let you find it out the hard way because if they did tell you that then you might not pay them at all and of course they couldn't stand that.

And another thing they don't tell you is that if you dispute the debt and can prove that you just might not have to pay the IRS at all because accoriding to what I have read IRS may not collect taxes on a debt which has been a subject of dispute. Now then, since I am not an IRS expert I would recommend that you use what I am saying about that and do your own research. And that is something I always teach. Never believe anything you read or hear about until you have done your homework and know for a matter of fact that what someone has told you is true and correct. In this type of situation ask a competent tax attorney or an accountant because they probably can tell you the truth of the matter. One author has posted the following which is what prompted me to write this article.

The debt-discharge surprise
Congratulations again! You convinced your credit card companies that, unless they reduce your debt balances, you’re going to file for bankruptcy, and they’re going to get nothing. They generously lowered you liability by $5,000 so you can pay off the balance over the next 24 months.

Here’s the nasty surprise: That $5,000 reduction is now ordinary income to you and could cost you as much as $1,750 in additional income tax -- if you're in the 35% bracket in 2004 and 2005. So much for getting your cash flow in order.

Unless it was sheltered by the umbrella of bankruptcy, debt reduction represents accession to wealth, clearly realized, and it is considered taxable income.

So the correct answer to a debt collector is to demand that they prove that you owe the debt even though you know that you do. Why? Because the Fair Debt Collection Practices Act says that you have the right to dispute the debt or any portion thereof and the debt collector is the proper person (company)to demand that of. Make them prove that you owe the debt and give you the opportunity to dispute the debt or some portion of it if you choose to do so. The law says they have to provide you with that information and your failure to demand that they do could lead you into a huge tax liability you were not prepared to deal with. So above all, dispute the debt before paying so they have to prove you owe it. Establish your dispute if at all possible.

So the next question might be does their failure to disclose the fact that they will file a 1099 on the unpaid balance constitute an Unfair Deceptive Practice? It MIGHT be.

How about a failure or refusal to provide you with the documentation you would need to dispute the debt or any portion thereof? That might be a violation of FDCPA and it MIGHT also be deemed to be an Unfair and Deceptive Practice. You MIGHT want to check your states UDAP laws to find out and then consult with a competent attorney who MIGHT be able to represent you in a lawsuit against the debt collector who is hounding you to death.