Be Careful With Credit Card Partial Payments in Full

“Have I got a deal for you,” the credit card representative says. You have been making just a little more than the minimum monthly payment for years now, and you seem to be getting farther and farther behind. And that is not the only credit card. You have five others, from when you were off work and had to get cash advances, and used the money to pay the electric bill, or car payment, or to help the kids. You feel the noose tightening around your financial neck, but you refuse to give up and scream, “Bankruptcy!”

When your credit rating is falling, there are no good deals from creditors. They have access to your credit report and know, even before you do, that you will be filing bankruptcy soon, so they are trying for whatever they can squeeze out of you. They know that as soon as you file your bankruptcy, you may owe them NOTHING! They are not making you an offer to settle your debt because they are good guys. They are trying to use you, before you talk to a lawyer, and understand the truth.

“Let’s see, it says here that you owe us $10,999. My boss is out of the room so I can make you an offer that will save you $10,000. Can you believe it? If you can send me $999 now, by giving me your debit card number, we will wipe the slate clean and your account will be paid in full.”

No, this is not a debit card scam, but I will call it a scam.

When you have the $10,000 discharged from your account, the government will look at it as income to you. You will receive a 1099 form that will show
$10,000 income from the transaction, and if you are at the 20% income tax bracket, you will owe an extra $2,000 on next year’s federal income taxes.

Bankruptcy does not work that way. In bankruptcy, there are no taxes on discharged amounts, and instead of dealing with each of the creditors individually, all creditors get the same deal, which is usually nothing to unsecured (hospitals and credit card companies) creditors.

If you might have to file bankruptcy in the future, all your well-meaning payments of just the interest on those credit cards will be wasted money. If you make several years of those payments, instead of filing bankruptcy, you will be paying money that the bankruptcy would determine the credit card company is no longer owed. Those payments could go toward food, rent, electricity, and the kids.

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