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.


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.


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:

  1. What can happen to you if you default on a credit card of $14,000
  2. If you are sued, can a judge garnish of pay. Which then will further affect him to survive.
    1. If you do not own anything capable of a lien.
    2. You are still paying on installment agreement on tax debt of $55,000
  3. 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.