An individual who incurred excessive debt due
to a failed business and divorce came to us for a consultation. He was concerned not only with the amount of
debt he had, but also about how that debt would impact his credit rating and
ability to borrow money in the future.
We asked him to prepare the following information for the initial
consultation: (1) the amount of money he owed creditors, including any pending
lawsuits; (2) the property or assets that he owned; and (3) an after tax
monthly budget, starting with the amount of money he made each month after taxes
less his ordinary and necessary living and work expenses.
His initial consultation took about an hour,
and we discussed how he should deal with the debt from the failed business and
divorce. His choices were either workouts with creditors or a Chapter 7 bankruptcy filing. After reviewing the information supplied by
the client, we agreed that workouts with creditors was a better way to proceed
then a Chapter 7 bankruptcy filing.
He made a list of all his creditors, and after
reviewing his budget, determined how much of his monthly cash flow he could
dedicate to paying his creditors. He contacted each of his creditors, and with
advice from James Shenwick, he was able to enter into workouts with all of
them.
These workouts generally involve either a
single payment of a discounted lump sum to the creditor or payments of money
over time against the monies due to the creditor (installment payments). The
timeline for these payments to creditors ranged from six months to 18 months.
Another factor that must be considered in
doing workouts with creditors (also known as out-of-court settlements) is the
issue of “relief of indebtedness income”
under § 108 of the Internal Revenue Code
(IRC). Section 108 of the IRC provides
that if an individual borrows money and does not fully repay a creditor, then
he or she is enriched by the amount of debt not repaid to the creditor, which
is considered taxable income. In round numbers, the IRC provides that if an
individual borrows $100,000 and repays $50,000, then he or she must report
$50,000 of income to the IRS and pay tax on that income. Generally,
institutional creditors like credit card companies will report this relief of
indebtedness income to the IRS via a 1099-R.
This client’s story continues with more good
news! After repaying his creditors, he was concerned about his credit score (FICO score) and his ability to
borrow money in the future to buy real estate or to lease or buy a car. He obtained a credit report from Credit Karma, and upon review, we
noticed several errors. Using a federal and state law known as The Fair Credit Reporting Act, he
retained us to contact those creditors and the credit reporting agencies to
correct the errors. It took some time and effort, but in approximately three
months we were able to correct those errors, and the good news is that he
reported to us that he applied for and obtained a new credit card, which showed
that he was now creditworthy! He was
very excited about this news and thrilled to have reduced his debt and
maintained his ability to obtain credit. Individuals with similar issues should
contact Jim Shenwick at (212) 541-6224 or jshenwick@gmail.com
for a consultation regarding their options for dealing with debt. Jim
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