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.

I am down to may last creditor and I am also down to the last money I have. I have approximately $4,000 that was given to me to use for debt settlement. My last creditor wants $4,100 right now to settle my final debt. This is my dilemnia; I only have $4,000 right now, my clutch is going in my remaining car (my last blog explains second car is probably being totalled), my tenant gave notice she is moving out of my second home so I need to give her back $1,600 for her last months rent and deposit, I need to purchase a wood pellet stove before winter ($2,000) or I'll never be able to afford fuel for the winter and I need to move. My house may not sell and if it doesn't, I have to find a tenant before winter and I won't be able to rent the house for what I owe monthly, I'll be short about $150 a month; better than a full mortgage payment and paying to heat an empty house.

So my last creditor has offered me two options to choose from; first would be 0% financing for 5 years on my balance. This means the nightmare is over, one small payment until it is paid in full (giving a better credit rating) and the ability to use my reserves for necessary car repairs and the wood pellet stove. The second option is debt settlement of $4,100 (55%) which will clean out my cash reserves leaving no emergency money and will pay off my final credit card debt.

I have additional funds coming in the form of an insurance check on my totalled car, which I wanted to use to pay off my remaining vehicle. I may have to trade my remaining vehicle next year as it is 9 years old and is very expensive to repair and it seems to be having more problems now, so next year I will be able to trade the car and not be tipped on my equity or I could use the insurance money to fix the clutch and buy the wood pellet stove and do the debt settement.

I'm leaning toward the 0% financing for 5 years and I'll pay more monthly to pay it off early. This way I will have money in the bank and be able to take care of expenses coming. It will leave me with a more positive credit rating on this card, but I will still owe $7,500 in credit card debt; I had wanted to get rid of all credit card debt, but I guess this is better than having the possibility of not being able to fix my car or heat my home this winter. It will take me a few more years to be credit card free, but the nightmare will be over and my credit will start recovering.

What would you do?