A friend contacted me about the debt problems he has. While I know a lot about investments and alternative investments, I’m not an expert with defaulting on debt and the legal issues that come along with it.
I figured a great way to help my friend was to contact my fellow Yakezie members and ask for their expertise. Any advice or suggestions to my friend is greatly appreciated. Please comment on this post and help my friend out.
My Friend’s Story
My friend has been a computer programmer for over 30 years. With only a high school education he started in the mail room (literally), and worked his way up to the position he is at now. His income is in the low six figures, has no dependents, and lives in a New York city borough. He rents, and the only decent sized asset he has is a truck which is worth approximately $700.
Around the middle of 2007, he suffered a massive depression. Nothing he did seemed to work in getting out of it. He sought out help from friends and family, but no one was able to help him. He started to see a therapist, but wasn’t helping much either. Another friend of his, who had bouts of depression, suggested he see a doctor. Eventually my friend went to see the doctor, and received medication for his depression.
My friend felt worse for a few weeks, and was trying to get help from wherever he could get it. Someone started to council him through non traditional means, and began to feel better. Eventually the medication kicked in and he felt better. The medication made him feel great about everything, and not have a care in the world.
FINANCIAL MISTAKES AND TAX FIASCO
During this period he made quite a few financial errors. He always carried some credit card debt, but it was never a problem. He started spending money very heavily. Then people started asking him for money, borrowing and such, saying they were going to help him. He unfortunately believed them. He felt better though, and was still in this “higher then life” state.
During this time he made the serious mistake by cashing out some ISO stock options for the company he works for. He thought they would be taxed at the long term capital gains rate, but later learned it was considered untaxed compensation. Untaxed compensation is taxed at a much higher rate, and is added to your AGI for the year. The stock options were cashed out in December of 2007 and January of 2008. This amounted to huge tax bill of over $125,000 (Federal & State). This was in addition to a large set of credit card bills he already had.
After realizing his mistake and not knowing what to do, he hired a tax firm to work out the details. They charged he $8,000 for the services, and was supposed to be all inclusive. They delayed the tax bills by submitting a tax extension with the government. He asked about the state bill, and the tax firm back tracked stating they wanted additional money to handle the state.
My friend decided he would do the state tax bill himself, and got an installment payment agreement. When 2008 rolled around he sent them my 1040 tax form by himself, the tax firm got upset with his decision.
The tax firm wanted more money out of my friend, and forced him to pay for for the state work needed. He initially refused, but the tax firm could not do the Federal with out doing the state first. Unfortunately this was more money out the door.
During this time he asked should he pay something on the Federal tax bill. The tax firm kept telling my friend don’t pay anything until the IRS tells notifies for the amount owed. My friend feels, if he would have just started paying the government, he would have been $15,000 closer to finishing the debt.
Eventually the government put a levy on his bank account because something got lost at tax firm he was working with. Then the tax relief company tried to work out an arrangement, but the government wanted $10,000 a month. There was no way my friend could afford that amount per month. Eventually everything was worked out as the tax relief company got another lawyer to complete in two months what was originally taking two years.
After all of this fiasco the tax firm he worked with is surprisingly no longer in business.
One of the lessons my friend learned about this episode, the government only cares about your minimum living expenses. They want their money, and they want it yesterday by hook or crook. According to my friend he’s on a really tight budget that’s very similar to a Chapter 13 budget. Anything else is disposable, and the government wants it now. At the time of submitting the tax forms, he and his lawyer inflated his expenses so that I had a few extra dollars to live with.
He was able to eliminate the state debt by extracting money from his 401k (not a loan). This caused another tax debt the following year since a 401k extraction gets taxed at a normal rate, and with a penalty before 65 years of age. He then pulled out more money to pay the tax debt, and to continued to pay off the credit card debt.
For the last two years he’s been extracting money from his 401k to pay monthly expenses, and credit card debts.
NOT MUCH LEFT
He’s now at the point where he has no more money left, and has to default on one or two credit card debts so he can continue living. There’s nothing else he can withdraw or loan against.
He tried going to two non profit agencies, and work out an easier payment plan. They were good at explaining everything, but the budget is still too high by about $300-$500/month.
His research found out Chase Bank will not accept their proposal because he was already on an internal payment plan. After seeing how the non profit worked, he went directly to Bank of America about a plan.
Bank of America agreed to his terms, and lowered my monthly payments.
Last credit card company he had to deal with was Citibank. His tax lawyer advised it’s an unsecured loan, and should pay the government first. The lawyer also stated normally a judge does not rule against a tax debt. She said she’s seen cases where the judge sees no money to recoup and forces the plaintiff and defendant to work it out directly. The laywer suggested he should contact Citibank to try and work something out.
After four communications, Citibank refuses to adjust the payment plan. It appears Citibank will not even try to adjust terms if you are current, which he has been for the last 4 years. He was advised by a Citibank representative they will not adjust payment terms unless he’s delinquent. So I stopped paying the Citibank bill. Collections has now called him twice. He tried to renegotiate with them to accept $200 a month until 2015, and then re-adjust when the tax debt is over. The customer service rep stated there were no debt programs for his account available.
All along people had advised him to claim bankruptcy, and not to worry about the credit card debt. He felt strongly that it’s the wrong thing to do. My friend would get a 1099-C, and have to pay the tax on the write off. Either way, my friend still has to pay it in some form. So he’s been trying to stretch things out until this debilitating tax payment is over with, which should be around first quarter of 2015.
He tried contacting the IRS a couple times and renegotiate their terms. Their response is to fill out more forms, and continue to say they only accept necessary living expenses.
My friend is approximately 50% there with his tax debts. He’s finished the principal tax amount for 2007. He owes $22,000 for penalties and interest. Then there is $30,000 for 2008’s tax debt. He’s gone as far as requesting a penalty abatement for the two years. The IRS acknowledges receiving the letter and doctors documentation, but they have not removed any penalties.
My Friend’s Questions Are:
- What can happen to you if you default on a credit card of $14,000
- If you are sued, can a judge garnish of pay. Which then will further affect him to survive.
- If you do not own anything capable of a lien.
- You are still paying on installment agreement on tax debt of $55,000
- While I know it’s an unsecured loan, by all right it should be paid and if it goes to litigation, what can be expected?
By looking at the IRS payments, the huge tax debt will be gone by first quarter of 2015, but the Citibank refuses to acknowledge or work something out.
Readers: What should my friend do? Any recommendations to help get rid of the debt faster? What lessons can be learned from this?
Photo: Tennessee Valley, CA. SD.
Wow what a tense story. I am sure there are plenty of people on Yakezie that could give advise, however, defaulting on a cc will just lead to more headaches, harassing phone calls and more depression. The most important is the government and then everything after that is secondary. I wish him well.
Jai
1) If you default on the credit cards, 2 things can happen. The creditor can sue you and win a judgment in court. If they do, they can garnish his wages (depending on the state) or put a lien on a property (which he doesn’t have). So technically, the only thing they can do is garnish his wages at this point. There’s federal & state regulations limiting the amount that can be garnished.
2) Even if you’re paying a tax lien, they can still garnish your wages depending on your income. But most likely they will. The best outcome is that the creditor sells this debt off to a 3rd party collection agency, and then settle with them.
3) I’m not sure if I understand your last question, but if the creditor takes your friend to court, they can garnish wages. Hopefully he can make payment arrangements with them prior to litigation.
Hey Kevin, some excellent thoughts here from a debt eradication expert. Thanks for sharing. I’m sure IJ’s friend appreciates this!
Kevin, is there a situation where you are not taken to court if you declare bankruptcy and have credit card debit?
Super Frugalette – Well if you file Chp 7 or 13 bankruptcy, you’re pretty much off the hook. Won’t go into too much details about how chp 7/13 bankruptcy works (since you can google this information), but most people actually file for bankruptcy because of this very matter.
For example, a ton of people who went through debt settlement programs ended up being sued by their creditors. They didn’t want their wages garnished, liens attached, or their bank accounts frozen, so they ended up filing for bankruptcy to stop all the litigation.
What a crazy story – I have never had to deal with any sort of tax issues before, but I do know that the government always gets their money, by hook or by crook like you said. Good luck with sorting all of this out with your friend – i’d talk to a lawyer (a new one)
What state does he reside in? (So we can check wage garnishment law in his state and check statute of limitations) And what’s his gross/net income?
NY. Don’t know his exact gross income.
NYC, Gross $125K. Taxes are around 43% with Fed/State/City, Tax Repayment is almost $29K / year.
As a side comment isn’t it sad you pay that much in taxes? Gotta move out of NYC, or get married, have kids and own a house. :-)
Check out Sam’s post on his site related to taxes, being single and high income.
I pay more in taxes then my sister makes in a year. In fact, I pay about 2x her salary in taxes. It kills me because she tries to get government or social services and they deny her saying she makes too much money.
Don’t feel bad. Imagine paying over $150,000 in taxes a year………. everything is relative!
The most you can be garnished in NY is about $217.50 per week. So about $870/month.
$870/month would force me to default on all the other credit cards.
Can they do that?
Do they even look at other expenses?
So in NY, they can garnish 10% of your gross weekly income or 25% of your weekly disposable income, whichever is less! So depending on the type of expenses you have, it could potentially be lower.
That is a massive tax bill. Situations like this anger me — why does an average hard-working Joe down on his luck get penalized so hard by the government, while the crooks and thieves in power get all of the benefits?
I unfortunately don’t have any specific advice to give in this situation, but I wish your friend all the best and hope that the best outcome for him can be reached.
Anytime you made money without paying tax, you’d better watch out. Save some money to pay tax later or move to another country. I just exercise some stock options and the broker withheld 40% of the proceed for tax.
Sorry, I don’t have any good advice. Just try to avoid this kind of situation if possible.
Thanks for the advice guys, You know, it is a bit sad about our society, when you are down, the vultures come out and penalize you to the umpteenth degree. The IRS is killing me with penalty and interest. That last $55,000 is 50% penalty and interest. The IRS is not budging on a adjustment or a penalty abatement, even with letters from the Doctor and supporting prescription copies. Most of the creditors have adjusted so the debt gets paid down faster. Citibank is standing it’s ground. It kills me that they are making $2000 a year in interest, and not willing to work out an arrangement that is affordable. Even if stretching out a bit would give them more interest.
I see the end of the tax debt in 22 months. This is a pretty hard line, after that I’ll have about $2500 disposable cash to pay of the other debts. It seems that Citibank is just working off some computer terminal calculation and I’ve not been able to get anyone’s attention to help clear this up.
For the record, I’m in the NYC area. I think I’m right at the point where I can’t file for bankruptcy because the debt can be paid off in 5 years, it’s just too inflated at this point in time. 2 years ago a lawyer said I could file for Chapter 7 or Chapter 13. I choose not to do bankruptcy because I feel it hurts everyone and the economy. looking back I probably should have done the Chapter 13 plan as everyone would have gotten paid, they just would not have been able to rape me on interest. The really sad part is that if the IRS would lower it’s monthly requirement, everyone could be paid in full. I mentioned to the IRS that I would be sued and garnished, they said, when that happens contact us, fill out form 433f and we’ll re-adjust.
In any case, I’m looking for the best way to handle this and also the time frame for which any court proceedings may occur. I’ve read horror stories where people are sued, but they never get the summons to court so the judgement is made without any review.
Also if I default and the bank files a 1099-C, I’ll be taxed on that.. adding to a tax debt. Since I’ll have to pay that, plus any other collection agency, will I have to pay the whole amount to the collection agency or can I use the tax paid on the 1099-C as leverage to subtract from the debt?
It is the greatest irony of it all that if creditors lowered their interest rates and penalties, more people would be able to pay off their debts. Although, maybe many more would take advantage and delay further.
From my experience, the IRS are very rational people who want to maximize their returns. They’d rather get something than nothing.
I advise calling them again and asking them a straight up question such as, “If I pay you X by Y date, will you forgive a certain amount of penalties and interest?” Emphasize you have nothing left. There has to be a discovery point where they say OK, send it in. But don’t send it in, until they agree to wife away the penalties.
BTW, try and have the face to face conversation w/ Citibank as well. Attack the IRS and Citibank in two separate steps. “If I pay you all I have TODAY, will you reduce XYZ penalty.”
If you default on the credit card, and the creditors write it off, you’re correct..you’ll be taxed on it. However, you might be insolvent and might not be liable for taxes. Usually creditors give you a 1099-C if they decide not to sell the debt to a collection agency.
If it goes to collections, that’s your best case scenario. It’s more rare that a collection agency will sue you, since they’re not in the business to take you to court. Try to negotiate a settlement with the collection agency. A reasonable settlement can be anywhere from 40-50%, but I’ve seen them as low as 20% before.
Any debt forgiven will be reported to the IRS, but like I said, check to see if you’re insolvent (you owe more than you are worth)
FWIW, I’m no slouch either. I had a second job working off the books in a local bagel shop until it became abusive. The owner had me working 10-12 hours a day on the weekend and would hand me $30 cash off the books, then ask me to drive him home. He would also have me use my truck to do deliveries and never reimburse me for the gas. Oh the best is how he would bring his daughters virus ridden PC in for me to fix instead of bringing it down the block to the computer store… Fixing PC’s and smearing bagels for $3.00 an hour! I got fed up when he kept laying me off to bring in new people for training. Those people rarely worked out because he would not pay them for the 2 weeks of training. So they would leave and he would call me back. Finally I stopped going into the store and just stay away.
In any case, the problem with a second job, is that the taxable income goes up, so the fed expects you to pay more of your disposable cash to them first.
I’m sorry that I don’t have any good debt advice. There is no way to file for bankruptcy? Seems like it might be better to start over. What are the statue of limitation on these cases? Can you leave the country for 10 years and come back clean? Just asking
He definitely makes too much money to file for Chapter 7, I’m pretty sure he doesn’t pass the means test.
At one point because of all the tax debt, I passed the means test for Chapter 7 on the CC cards. I was at the lawyers office and we figured it all out. However, since I stuck it out and did the best to work out out, I no longer pass the means test for Chapter 7. It’s highly likely I would not pass the means test for a Chapter 13 because 5 years from now I could have most of this debt paid off. It’s all a matter of too much at one time. I’m not sure about leaving the country because of a $13,000 CC debt requiring a little over $300 a month to pay down. Actually if I could get the IRS to agree to $1500 a month instead of $2400 a month, or at least get a 6 month hold on the Installment Payment Agreement, then I would be able to pay 1 or 2 credit cards, then be on a balanced budget where everyone gets paid 100%. That’s the sad part about it. I can see how everyone can get paid, but there are Agencies and/or Companies unwilling to work things out.
What’s the exact status of your credit cards? Are they current and on time?
Everything is current at the moment. Citibank was behind 2 months, then somehow a $2000 payment magically appeared on my statement. I did not put it there. Someone must have made a mistake. I’m sure it will be reversed when found. Then I will be delinquent by two months. All other cards are current. Both Chase and Bank of America adjusted their two cards each. There’s a total of 7 cards each with a balance.
Under normal circumstances I never would have used all 7 cards. I did not need to. However I was in the depression episode, I was moving balances to 0%apr and then with the urging of assistance from a couple of friends I ran up a balance on each. They turned out to be vultures who were bent on their own interests. So that, along with the medication, made me very complacent.
That’s so weird how a $2000 magically appeared. Have you looked into lowering your interest rate and payments by seeking credit counseling? Their fees aren’t that high (m/b $30-$40/month), but they will be able to lower your interest rate and payments. I know Citi will probably reduce your interest rate to 9.9%, and Chase will lower it to around 6%
I have no expertise in taxes, but if you are able to negotiate some type of settlement, make sure you give it in writing. Also pay by certified check and never give them direct access to your savings or checking accounts.
Good luck, man.
I have had friends that have filed bankruptcy and I learned a few things from them. Apparently regardless of the debt you have, if your income is enough that you can make the minimum payments, then they will not excuse the debt or reduce it. The one time that they will consider it is when you tell them that you can pay off a percentage of it all at once. For example you owe 15k and say you can give them 8k now and not in payments. This money isn’t really easy to come up with especially is you’re struggling to make your minimum payments. Also, you have to stop making payments to even have them consider negotiating your debt. There is a lot to consider and I wish you luck!
@Kevin, I have tried going to some credit counseling organizations. When I saw what they were doing and how they were doing it. I called the creditors directly. Chase is already at 6% from an adjustment I made a while back. Bank of America switched me to a 4% and went from $300/mo per card, to $190 and $240 respectively. CCCS stated Citibank will accept 9% apr and 2.5%/month. I tried to get them to lower it to $200/month but they will not. Citibank will not budge. If I could get Citibank to work with me @$200 a month for 24 months and then ramp it up later, I would be able to get them paid in full. I was told by a Customer Service Rep, Collections will not even talk to you unless you are delinquent. So I stopped paying them. They started calling and I tried to negotiate a payment plan that would work for me. They said no. Then this $2000 payment appeared on my statement. So now I have to wait for it to come off. At the very least I have a month of quiet until they start calling again. Maybe I’ll get a bonus this year and be able to satisfy other bills and subsequently be able to re balance things. I have a couple of Antique’s I’m selling off and other avenues of moving around money.
Great job on taking the initiative to contact your creditors directly. Those interest rates sounds right along the lines of what you would have received from credit counseling organizations.
So here’s what I would do…it looks like you can manage your other accounts pretty well and you already have a low affordable payment. In regards to your Citi account, if they won’t budge on your monthly payment, just settle the account. I would wait about 4-5 months until it’s delinquent, and settle with them right before charge off. The last settlement I did with Citi was $20k debt for $9k. If you shoot me an email, I can send you over an ‘insolvency worksheet’ to see if you may be liable for taxes: kevin.yu@debteye.[c][o][m]
Wow, what a story. I hope you can work things out some how. I always find creditors to be like insurance people. They are there to screw you not help you.
Um, I have no idea what to say, but Yakezie is a great place to find people — like many commenters above — who have good ideas. Good luck.
If he defaults on the cc debt of 14k, the original creditor (citibank, chase etc) will sell it off to a third party. The third party now owes the debt, when third party buyers buy defaulted debt they buy it at a discount. It’s usually ranges from 2-7cents on a dollar, with that being said. The third party creditor will try to contact him to collect on the payment, if they are unsuccessful. They will have to take your friend to court to garnish your pay. third party creditors cannot automatically garnish your pay unless they are successful with the judgement.
Regarding the tax bill, he needs to either get a Offer in compromise from the IRS. I know he had a rough experience with the tax firm. But look for another who can help him, and who specializes with dealing with debt matters with tax authorities.
Thanks Money Mentor. So far I’ve got my head above water. The $2k that magically appeared on the CC statement lowered the monthly payment so that I can scrape by. Skip a few meals. Sell off a few things and I’m not defaulting yet.
As for the IRS. An offer in compromise requires a check with your payment. With my debt this has to be substantial to pay it all off. So it’s sort of a catch 22. I would have to default on the Installment agreement with the IRS. Work with a tax specialist, get a POA and go through what was described to me as a 10 month offer cycle. Thing is many of these tax firms are pretty aggressive in how they try to grab your money. Last company I talked with kept trying to convince me to stop paying the IRS, pay them $4000 upfront, get the POA and drag it out for 8-10 months. I would have to pay them $400 a month. She said she could get a 30K debt down to 6K (Then there’s the 4K + $400/month for 10 months) fee.. Frankly, I do not believe they will be successful. The IRS considers anything above the most basic living expenses disposable income. Even CC debt. Since I would have the ability to pay the IRS if they ignored the CC debt, they would not accept an offer in compromise. This is how it was explained to me by the one tax lawyer who fixed what the other firm messed up. What drives me crazy is once you go on public record with a federal lien all these tax firms start contacting you saying you will pay pennies to the dollar. That is only true if you cannot pay the debt in 5 years. (While only paying for necessary living expenses). Since I had a 401K the IRS assumes that is something that can be levied or utilized, and it was.. Up until now.
The IRS is a pain in that they don’t want you to use your 401K to pay the debt, because you will incur a new tax debt, but they will not let you pay other debtors either. It’s been very difficult to work out.
Then there are these tax firms who will tell you anything to get that upfront fee. They even resort to scaring you purposely. I’ve been through all sorts of tactics.
If I can see my way to getting the tax debt under $25K by the end of the year, then I may be able to renegotiate the crippling payment to the IRS.
Thanks for your time and comment.