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It is Finally Over ... or is it?

July 2nd, 2008 at 10:46 am

The debt settlement chapter of my life is finally over. I have managed to bring all my debts current and settled a massive amount of credit card debt. Now my credit will start to rebound and maybe after a year or two, I will be considered credit worthy again. I've seen this with my clients so I know that it does rebound; much better than filing a bankruptcy that stays on your credit for 10 years and would have ruined my career. I settled the following debts:

BOA - Settled at 38%
Chase - Settled at 45%
Citi - Settled at 38%
Discover - Settled at 50%
Sears - Paid down $1350 and am making 0% interest on the remaining $6,100 in credit card debt.

My total savings was $78918.93. It's not over yet; I will get 1099's from each credit card company and I have to count that as income; so I had a very good year and I wish I had made that much at my job.

Fortunately the IRS has an insolvent provision (publication 908, form 982; cancellation of debt) so you take your financial position at each point of debt settlement (the day you paid) and if your liabilities exceed your assets, you are insolvent. According to my calculations; I'm insolvent to the tune of the first $45,000, that means I have to pay tax on $33,918.93 at possibly 28%, which would be approximately $9,500. I generally get $5,000 back in a tax refund so I will need about $4,500 when I file taxes next April. I am definately going to need a tax professional to help me deal with this; the last thing I want is a tax audit.

My saving grace will be if I can sell the house and make about $15,000; that will solve the tax problem and the rest of the funds would go toward the $26,000 401k loan I have remaining; I had to take out a 401k loan to settle this mess. I'm fortunate that that is all I owe, I was able to save money, sell possessions and had some money given to me by my DH. If I do not sell the house, I could make installments to the IRS until next filing,in 2010, when I would get enough back to pay them in full. I've talked to them at length and they have a 5 year, 8% interest installment plan (I don't need another payment, but if I can't save enough between now and then, I will have to do it; I don't want a tax lien on my house or a freeze on my bank account).

So I should feel a great relief right now, but I have a tendency to worry about unfinished business. I guess I consider this unfinished until the IRS is done with me. I have considered consulting with a tax professional in the next few months just to be sure I'm understanding everything properly. I have filed my own taxes for several years, but I've never had this situation before and the tax instructions and definitions of assets and liabilities are vague.

So technically, I went from $135,000 in credit card debt to $26,000 in the form of a 401k loan, $6,100 I still owe Sears and $9,500 in tax implications; a total debt still owed of $41,600. So in the last six months I have reduced my debt by $93,400. That is truly amazing when you look at it in dollars and cents. My goal is to pay off that debt by the end of next year. I have several plans on how I will do that, including selling the current house I live in; this housing market has to turn around soon.

Don't get me wrong here; I'm very grateful and thankful that I've been able to clean up and reorganize this situation I'm in. I feel truly blessed and feel there was some devine intervention here.