There may be certain circumstances when a consumer does not need a bankruptcy filing, especially if they are only concerned about a few specific debts. Given that is tax refund time, many consumers may have suddenly cash available to satisfy old debts that have gone to collection. In the alternative, an individual may seek assistance from a family member to resolve their debt issues. Before sending money off to a collection agency or creditor, keep the following in mind.
1) Request confirmation in writing that the collection agency represents the creditor. There are many scams where a fake collection agency may call you to collect on a real account which they discovered on your credit report;
2) Also confirm the amount to be paid in writing, along with the method and manner of delivering the funds. Do not give anyone permission to draft your bank account! Instead, insist on mailing a personal check to the creditor via certified mail, return receipt requested. This way, you can verify that the payment was received before any due date, which is especially important if the check is not cashed until sometime later;
3) When you fill out the check, write “full and final satisfaction of debt owed to (creditor) being account number (***)” somewhere on the check. If the creditor accepts the check, this language will protect you from a later claim that some amount of the debt is still owed;
4) If the creditor has agreed to accept less than the full amount owed – which is not uncommon if the debt is several years old – keep in mind that there may be income tax consequences. Creditors are obligated to report the waiver or forgiveness of any amount of debt in excess of $600. Any amount of debt that is forgiven by the creditor can be treated as “cancellation of debt income”, meaning that you would be taxed on the amount of debt that was forgiven. Let your tax professional know if you have compromised any debts in the year leading up to the filing of your tax return;
5) Save all correspondence regarding the satisfaction of the debt, especially including a copy of the front and back of the cancelled check. A debt may accidentally be resubmitted for collection, and you will need records to dispute it;
6) Finally, verify the treatment of the debt on your credit report. Usually creditors will indicate that the debt was “settled for less than the full balance” or “partially paid in full satisfaction of debt.” Be prepared to explain the treatment of the debt if you apply for credit during the debt reporting period.
Resolving old debts is an admirable endeavor, but avoid being hasty to prevent future problems later on. Verify, document and save, and you can be confident that the satisfied debt will not rise from the grave to trouble you again.