ZipDebt Debt Relief

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Charles Phelan

Making the Tough Financial Decision — Our Dream Home Goes On the Market

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How A Seasoned Debt Coach Took His Own Advice and Paid Off $63,000 Credit Card Debt

by Charles J. Phelan

This is the story of how a financial coach with a deep reservoir of hands-on experience still managed to get himself into $63,000 of credit card debt, and then solved the problem by making the same kind of tough decision he would recommend to a client.

In this first of a 3-part series, I’ll explain how I got into a financial bind despite years of experience. In the second installment, I’ll discuss how I went about solving the problem. And in the third and final article in the series, I’ll let you know how it all worked out, talk about making tough financial decisions, and hopefully get you thinking positively about your own situation.

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Part I, Heading Over A Financial Waterfall

We had just moved into our dream home, a 2,500 square foot single story beauty of a ranch home, with privacy and an incredible panoramic view. It was our little slice of paradise, purchased in late 2010, the best house I had ever had the privilege of living in. No other property we’d ever rented or owned came close to its upscale quality and unique charm. I figured this was it, our forever place.

“Coffin, or urn,” I told my wife. “You can pick either one, but the only way I’m moving out of this house is feet first.”

“Famous last words,” she replied.

“No, seriously. I’m never going to move again, period, end of story.”

“Never say never,” came her savvy response.

She was right. I was wrong. As I write this four years later (January 2015) I no longer own that house. In order to solve a deepening financial crisis that developed after we bought the home, I made one of the toughest decisions of my life and put our dream home on the market less than four years after buying it.

How did I get into financial trouble? The short version is I bought an expensive home just as my business income was about to drop off a cliff. Why did I take the plunge and buy a house in 2010 when the real estate crisis was still going strong? For starters, we were beyond tired with the rental home we had been living in since 2001. We had been working hard all our lives, and figured in our 50s it was time to acquire a nice home for the long term.

I had owned other properties and sold them well before the meltdown that started in 2007, and then went for years without being a homeowner. When the worst of the market crash seemed to be behind us, and our income had been healthy and stable for more than three years, I took a closer look and saw it was a buyer’s market. I felt the time had come.

I’m a self-employed debt consultant, with a unique niche in coaching consumers and small business owners how to settle their debts without paying big fees to get the job done. Business was very good during the peak years of the Great Recession, and it seemed like there was no end in sight to the tidal wave of distressed consumers seeking assistance with their debt problems.

While business was good, I put my nose to the grindstone, worked 12-14 hour days without vacations, and helped thousands of people. I stayed completely free of debt myself, remained frugal and built savings. Based on my financial situation in early-2010, I was approved for a home purchase up to $850,000, with 20% down payment.

I had the cash for a down payment, but didn’t want to overextend on the monthly mortgage and taxes. So I pulled back and focused on properties under $700,000. Let me be clear that I didn’t lust for a mansion or anything extravagant. In the San Diego coastal area, condominiums can sell for upwards of $800-900k. But to be conservative, we forewent the pool and golf course or beach location, and shifted away from the more expensive coastal area to inland regions where values were better.

We found an amazing home in Escondido, and after some negotiating ended up with a fair price of $654k, around $200k below the level I’d been approved for. Since the mortgage payment wasn’t much higher than the rent I had already been paying, I felt I was being prudent in this decision, and went ahead with the transaction. By the end of October 2010 we had closed escrow and were over the moon with happiness as we settled into our new home.

Our total household credit card debt at the end of 2010 stood at zero, and we had also paid off both vehicles long before. Our only debt was the house, $523,000 to Wells Fargo on a 30 year fixed conventional mortgage at 4.375%, payment at $2,612.26 per month (principal and interest).

Now, here’s where I have to get a bit more personal. If I just leave you with the raw financial data, it won’t present the whole picture. It won’t include the emotions that influenced my decisions along the way. To get the financial gist across, I omitted some truly important factors. I left out that we were buying this home during a time when my wife was seriously ill with surgery pending.

To make matters worse, since applying for financing earlier in 2010, my revenue numbers had been steadily dropping month after month. This added enormous pressure to move quickly before losing qualification. There were also numerous other personal and family crises contributing to our stress levels.

The pressure got so intense, my body reacted violently. I was unable to keep any food down for three straight days after I wrote the deposit check to open escrow. A week or so later, a blood vessel popped in my left ear, and the hearing in that ear turned to mush. I nearly incurred permanent hearing loss, but for a quick diagnosis and treatment by a good doctor.

These were psychological and medical warning signs I was in over my head. But I come from a tough New England clan, so I did what we do. I sucked it up and bulled my way through these challenges and “got it done.” We bought the house, moved in, and that was it for me. Never moving again, you see. Coffin or urn!

The truth was, I had a good sense of financial security before buying the house and promptly lost it the day I wrote that first check.

Nothing lasts forever, especially business income in the age of the Internet. It would take a separate series to explain all the ups and downs of the debt settlement field I’ve worked in since 1997. It’s a volatile industry, but during the peak years of the financial crisis there was a long period of increasing demand for services. After several consecutive years of posting great numbers, it was easy to get lulled into a false sense of security. Even us “pros” can make this mistake.

It’s hard to see a bubble when you’re inside it. This was true of the real estate bubble, and it’s also true for individual industries when they hit a boom period. Conditions were good for a long time in the debt relief world, long enough that I overlooked the old adage that past performance is no guarantee of future results. I made the false assumption those conditions would continue for the foreseeable future, and I was quickly proven wrong.

The entire debt relief industry hit the skids in late 2010, right when I was buying my dream home, although I certainly didn’t see it clearly enough to know what was happening at the time. There were a series of factors and changes that turned into a perfect storm, resulting in dropping income numbers month after month, and a shift from profit to steady losses.

It can be truly astonishing how swiftly business conditions can change. One moment you’re riding high and can do no wrong, and in the blink of an eye some new technology or company or website has left you in the dust. Just ask Blackberry. Once the reigning king of mobile devices, now a limping distant entrant in the tech wars.

One moment I had a prime link to my website from a highly ranked article page on a major financial news site, in place for years and generating tons of highly qualified traffic. Then, in a flash the article was gone, scrubbed from the financial site and replaced with a newer article that didn’t feature my link. Result? A 30-40% drop in traffic overnight. Trouble.

I won’t get started talking about the Google updates, how they fiddle with the search software to mess with the people trying to game the ranking results — many businesses operating in good faith get creamed in the process and that’s just what happens in shark-infested waters.

One of the assumptions I had made in my analysis was regarding property taxes, not a trivial expense at $7,500 per year. “They’ll pay their own way via tax deduction,” I told myself. Based on prior year taxes, I could use the deduction, and the tax savings would just about offset the taxes. On paper, it looked like a wash, and I congratulated myself on good tax planning.

Out in the real world, business income did not pace that of prior years, not even close, and I wound up losing money instead of turning a profit. As a consequence, I didn’t generate the income needed for the tax savings to pay off as intended. Instead, I had to come up with a way to pay those taxes when funds were tight. Enter the credit card and its tempting features!

Going into the crisis period, I had zero debt and well over $120,000 of open available credit across numerous accounts. I had kept credit lines open for just such an emergency, and carefully added more over time. After seeing negative cash flow month after month with no end in sight, I decided to conserve liquid cash by taking advantage of 0% promotional interest offers.

“Things will pick up yet,” I kept telling myself, always the optimist. But the numbers continued dropping in 2012 while multiple personal tragedies occupied our attention. It seemed like I never had the time to truly enjoy the dream home I had worked so hard to acquire. Nor did I have the income needed to properly maintain the place, let alone invest in the kitchen or bathroom upgrades we had planned. We weren’t even able to furnish the place the way we wanted to.

As time passed, our dream home gradually shifted from feeling like our pride and joy to feeling like a burden. Look into the price of a new roof or a new HVAC system and you’ll get the picture. If something breaks in a rental, you call the landlord. If you’re the landlord, the bill is on you, and some of those bills can be heart-sinking whoppers. You can go without such expenses for a long time, or you might get hit with a disaster tomorrow. The point is that even the best estimates for upkeep on any given property are based on the past, and the future won’t necessarily resemble the past.

By the end of 2011 our total unsecured debt stood at $18,600, virtually all of it added that year. A year later, the total credit card debt had climbed to $38,550. During 2013, I drew down cash to keep from adding further to the debt, but we had still reached $43,000 at year-end 2013.

So that’s $43,000 of debt added in just three years, with more on the way …

Please don’t try this at home! When it comes to credit cards, I know what I’m doing, so I was able to juggle multiple accounts to keep interest expenses as low as possible. I was using the cards as a shock absorber, to conserve cash for emergencies, keep the business going, and pay large one-off expenses like property taxes.

There are times in life when taking on debt is unavoidable. When it happens there should be no fear involved. But there are also times when it’s necessary to recognize financial reality and make the tough call.

Picture yourself in a canoe on the white waters of a fast river, being buffeted around violently and careening toward a waterfall that’s just around the bend. What do you do? That is the question I asked myself as 2013 turned the corner on 2014 and I could no longer deny I was in deep trouble.

… continue to Part 2

Mortgage Forgiveness Debt Relief Act Extended Retroactively for 2014 — Great News for Consumers Who Had Primary Home Mortgage Debt Canceled Last Year!

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In 2007, Congress pass the Mortgage Forgiveness Debt Relief Act (MFDRA) and initially set it to expire at the end of 2012. This temporary change to the IRS tax code permitted an exclusion for cancelation of debt income associated with forgiven mortgage debt. The Act was later extended for the 2013 tax year, but then expired again on December 31, 2013.

The MFDRA has been hugely beneficial for consumers who lost homes to foreclosure or short sale. Let’s say you did a short sale and the lender forgave $100,000 of mortgage debt as part of the agreement. Without the Act in force, that $100,000 of forgiven mortgage debt would be treated by the IRS as taxable income! We’re not talking about a capital gain taxed at 15%, but rather ordinary income taxed at 25% to 35% or more, depending on your specific tax situation. Hello, unexpected tax bill for $25,000 to 35,000 or more!

It’s true that another exemption exists for those who were insolvent just before the cancelation of debt. But for the person with retirement accounts or other assets that exceed total liabilities prior to the cancelation, the insolvency exclusion is not available.

Throughout calendar-year 2014, tax professionals and realtors specializing in short sales have been deeply worried that Congress would not extend the Act again, leaving many Americans with a stiff tax bill they hadn’t planned for. But fortunately, the Mortgage Forgiveness Debt Relief Act has officially been extended again for 2014. This retroactive extension was signed into law by President Obama on December 19, 2014 (better late than never!), as part of the late session spending bill approved by both the House and Senate.

This is great news for people who had primary home mortgage debt canceled during 2014. If the MFDRA had not been extended, hundreds of thousands of Americans who lost their homes or sold short last year would have had to pay massive tax bills on income they never actually received.

What will happen for the coming 2015 tax year remains to be seen, although there is no question the right thing for Congress to do is extend the MFDRA again for mortgage debt canceled during 2015. There are still too many homes underwater, too many houses in the foreclosure pipeline for this exclusion to be allowed to expire again.

It’s important to understand that the relief provision is limited to “qualified principal residence indebtedness,” which is defined as any mortgage you took out to “buy, build, or substantially improve your main home.” Income, rental, or other commercial property does not qualify.

If you had a cancelation of qualified principal residence debt in 2014, it is not necessary to calculate solvency vs. insolvency. The Act permits an exclusion of taxable income up to $2 million of forgiven qualifying debt, without respect to the financial position of the debtor.

You may also face a situation where only part of the forgiven debt is qualified principal residence indebtedness. In this case, the difference can still be excluded if you would otherwise be able to claim insolvency. For example, many home equity lines of credit (HELOCs) do not qualify as principal residence indebtedness because they were not used to buy, build, or improve the property.

Let’s say you sold short a property where $100,000 of qualified first mortgage debt was forgiven, and a $50,000 HELOC (used to pay off credit card debt) was also wiped out and canceled. You can claim the exemption for principal residence indebtedness only for the $100,000 first mortgage. The HELOC does not qualify for this exclusion because the $50,000 of cash was not used to buy the home or finance home improvements.

You can, however, still claim the insolvency exemption for that $50,000 of forgiven HELOC debt, provided you were insolvent by more than $50,000 just before the cancelation.

Regardless of whether you are claiming insolvency or just the relief granted under the MFDRA, you must still submit Form 982 with your Federal Form 1040.

To assist those who are struggling with the official IRS Instructions for the “tax form from hell” (i.e., IRS Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness”), zipdebt.com offers the Form 982 Calculator for only $29. This easy-to-use calculator will save you countless frustrating hours filling out this notoriously difficult tax form.

Settle Your Debts in 2015!

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It’s the very last day of the year and 2015 is just around the corner. If you have put off cleaning up old collection accounts, or you’re facing a financial hardship and can’t continue making payments on your credit card debts, then you need to know that debt settlement will still be a viable solution in 2015.

In fact, next year may be a very good year for settling debts, especially because there has been strong pressure on the collection and debt purchasing industries to clean up their act. Some experts are predicting less creditor litigation in the coming years, as documentation standards for purchased debt continue to tighten.

There have also been numerous enforcement actions by the Federal Trade Commission and the Consumer Financial Protection Bureau against collection agencies that were routinely violating the law. And of course, just like every other year, many debt relief scams have also been shut down by Federal and state authorities. But no matter what happens in terms of regulation or enforcement, the basic financial math that drives banks to settle will still be in place.

Debt settlement will therefore remain a valid and viable alternative to bankruptcy (especially Chapter 13 bankruptcy) for the foreseeable future. However, the creditors will make adjustments to what they may accept for settlements, and changes are sure to happen.

That’s why it’s important not to rely solely on advice from reading the various debt relief forums on the Internet, as useful as those sites may be for overall information. A creditor settling for 35% today might only be willing to take 45% tomorrow, or perhaps become more lenient and start accepting 30%.

What I do here at ZipDebt is monitor the trends across a large number of settlements, so I can keep my “finger on the pulse” of what is happening and guide you to the best possible settlement for any given creditor. I take the guesswork out of the process, and hand you the playbook of the other team so your success is assured.

I should also mention that ZipDebt will still be going strong in 2015 when others in the debt relief field have come and gone. I’ve been at this since 1997, and 18 years later I’m still here when many others have exited the industry. As the financial crisis has wound down, there is far less delinquent debt and fewer people in trouble. But we’re still seeing hundreds of thousands of annual bankruptcy filings, and good paying jobs remain hard to find. So I know that people still need help out there and that’s what I’m here to do.

Long time readers of The ZipDebt Blog may have wondered about the lack of new posts for 2014. I do plan to resume regular posting in 2015, and some of what I will be writing about is the financial challenge I myself faced in 2013-2014. I made a very difficult decision to sell my “dream home” in order to solve my own debt problem before it spiraled out of control. As long as I’ve been in the financial sector, I’m still learning. I still make mistakes on occasion, and then try to learn from those mistakes. I hope to share this story soon, and perhaps inspire others to make the tough choices needed to regain a sound financial footing.

Best Wishes for a Very Happy New Year!

ZipDebt Client Comment Forum (2007-2019)

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This post is intended to provide a forum for ZipDebt clients to post comments about their experience with the program. Recently, I spoke to a person interested in my program, and they told me that they didn’t bother to read any of the testimonials on my site because “everybody fakes testimonials.” Well, that’s probably true of many (if not most) debt-related websites. Not so with ZipDebt. ALL of my testimonials are real. No need for faking it here. But it gave me the idea of providing a way for clients to write in and post comments on their own.

Feel free to write about your experience of handling your own negotiations with training and coaching by yours truly.

Two simple ground rules for posting your feedback:

1. Please do not mention bank names or the names of collection agencies. (Two reasons for this: One, I don’t want to get drowned in blog-spam by debt collectors who work for said companies, or notices from their legal departments, etc. Two, settlement percentages are a moving target, and a bank/agency that settles for 30% today may stick with 50% tomorrow, and vice versa.)

2. Please do not include website links or html tags in your posts.

3. No profanity please (however tempting it may be to dump on your favorite debt collector). 🙂

Otherwise, please feel free to relate as much or as little as you care to share with others. The main purpose here is to help the folks who are struggling with their decision about whether to use this strategy in their situation.

Insolvency Calculator for IRS Form 982 Now Available! Only $29!

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zipdebt.com proudly announces the launch of our new INSOLVENCY CALCULATOR, designed to help taxpayers and professional tax preparers determine taxable income associated with 1099-C “cancelation of debt income.”

At the super-low price of $29, this Excel based calculator will help you save HOURS of time in completing “the tax form from hell” (Form 982). You can buy it right now, download immediately, and get to work on your Form 982 within minutes.

Click Here to Buy the Insolvency Calculator for Instant Download

Every year when tax season rolls around, I receive numerous questions from anxious taxpayers who have received 1099-C forms for debts settled the prior year. People want to know if they will have to pay taxes on the forgiven debt, or how to determine whether the “insolvency exemption” will apply to their specific situation. I wrote a blog post several years ago on the subject of “Debt Settlement, Insolvency, and Income Taxes,” but there still seems to be no end to the questions people have on how to actually perform the calculations needed to determine insolvency.

That’s mainly because the IRS instructions for Form 982 read like they were written by a CPA with a MBA from Harvard and a mission to confuse as many people as possible! Even professionals are frequently stumped on questions about calculating insolvency, figuring out the exemption, and then filling in the rest of the form correctly.

Tax preparation software is of little help in dealing with Form 982. For example, what if you have received more than one 1099-C? There is simply no software out there that is built to handle that type of situation.

Due to the difficulty in understanding how to calculate insolvency and how to fill in Form 982 correctly, every year taxpayers leave millions of dollars on the table by simply ignoring the insolvency exclusion and then paying taxes on the canceled debts, even when they would have qualified for an exemption. Or worse, they ignore the Form 1099-C entirely, don’t claim the income, and then get audited for underreporting!

The IRS instructions for Form 982 indicate that approximately 11 hours of time should be allotted for this one form!!!

If you are preparing your own taxes and need help with handling a 1099-C, YOU NEED THIS CALCULATOR!

If you are a professional tax preparer, you already know what a headache it is to calculate insolvency and reduction of tax attributes. Here is the calculator you’ve been waiting for!

Click Here to Buy the Insolvency Calculator for Instant Download

Product Features

    • Easy to use calculator in Excel spreadsheet format (requires Excel 97 or later version)
      • Quick Start Guide will have you up and running in minutes!
        • No need to understand formulas, just input your data and the results are calculated for you automatically!
          • Detailed 38-page User Manual, with line-by-line instructions
            • Includes support for multiple settlements, multiple 1099-Cs, expandable as needed
              • Also covers cancelation of mortgage debt
                • Detailed extensive examples provided for different tax scenarios
                  • IRS Form 982 and Publication 4681 included for reference
                    • Includes detailed information on how to calculate insolvency, full or partial
                      • Includes calculator for determining what to show in Part II of Form 982 (Reduction of Tax Attributes)
                        • Shows total taxable income (if any) and total reduction of tax attributes
                          • Fill in Form 982 quickly and easily with help from this amazing calculator

                          Click Here to Buy the Insolvency Calculator for Instant Download

                          Debt Settlement Solutions: Slow Torture vs. Fast Relief!

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                          Consumers researching debt settlement solutions need to be aware that there are two very different approaches to the strategy: the Long-Term Method or Fast-Track Debt Settlement™ (pioneered by ZipDebt). We might also call these “Slow Torture” or “Fast Relief.”

                          The Long-Term Method is where you start the project with nothing to work with – no nest egg, no stocks or savings, no IRA, no family assistance, no assets to liquidate, and so on. You have hope and that’s about it. When your only financial resource is your paycheck, the source of settlement funds is limited to the stream of cash previously associated with the minimum monthly credit card payments, now diverted to a set-aside account for settlements.

                          Since the pace at which funds build is slow, it’s usually only possible to settle ONE ACCOUNT AT A TIME. This will go fine for a while, but eventually the ones you haven’t settled will escalate out of control. Once multiple lawsuits kick in, the project gets derailed and you’re right back to the bankruptcy conversation all over again.

                          Fast-Track Debt Settlement™ means starting the project with some financial resources, such as a 401k loan or a private loan from a family member. Supplementing lump-sum funds with additional monthly savings from the household budget allows you to take advantage of multiple settlement opportunities as the accounts reach their respective charge-off deadlines. The whole point of this approach is to SETTLE QUICKLY and AVOID LAWSUITS.

                          If you’ve shopped debt settlement solutions, you know that most of these companies still talk in terms of 36-48-month programs – “Slow Torture,” in other words! This is pretty crazy from my perspective, since I’m the person who invented the 36-month settlement program in the first place! I abandoned it long ago as no longer effective.

                          Things change. Debt settlement companies, apparently, do not, so they still quote 3-year programs knowing full well that most of their clients will see multiple lawsuits if they take that long to settle. The odds of litigation climb sharply in the second year of collections. There is also risk during the initial 12-months, but it’s typically a risk that can be MANAGED, compared to risk that is OUT OF CONTROL.

                          Fast-Track Debt Settlement™, or “How to Get Out of Dodge Before the Shooting Starts!”

                          Here are the key reasons why you want to settle inside the 180-day charge-off deadline (or shortly thereafter) whenever possible:

                          1. Mechanical settlements – Most of the major credit card banks have automated processes in place that are designed to present settlement offers to customers. These processes are in operation through the charge-off deadline and beyond.

                          2. Improving offers – The settlement offers presented by bank collection reps tend to improve (i.e., decrease in required settlement percentage) as the account winds its way toward charge-off.

                          3. Fewer collection agencies – The fewer collection agencies involved, the easier the project becomes for the average consumer. While there may be third-party collection agencies involved in this early phase, most creditors work their accounts using internal reps up to the charge-off deadline.

                          4. Limited lawsuit risk – Risk of getting sued before charge-off is limited to certain specific creditors on larger balances. The risk of lawsuits is therefore much more manageable during the initial 6-month period.

                          5. Better predictability – Most of the major credit card bank settlement practices are pretty well established, and therefore predictable within certain limits. After charge-off, things get much less predictable, and virtually ANY account is at potential risk of litigation if enough time lapses without settlement.

                          6. Better settlements – Settlements negotiated directly with the creditors before charge-off are nearly always at or below 50%, with this being an upper boundary. In 2012-2013, we saw most of the major creditors settling in the 30-40% range, and one or two down in the 25% bracket. These are simply better deals (negotiated with less hassle) than are usually available via many collection agencies – especially when aggressive attorney collections are taken into account.

                          When you settle your debts on a Fast-Track™ basis, all the negotiations are conducted in parallel and as many of the settlements as possible concluded before the charge-off deadline. (Bear in mind that settlements often involve installment payments that extend 1-2 months beyond the deadline.)

                          There can be one or two very stubborn creditors who choose not to offer a reasonable settlement figure before charge-off, so the above guidelines do not apply 100% of the time. However, any accounts not resolved before the deadline can usually be settled within 3-6 months after charge-off, putting the whole project within a 6-12 month timeframe depending on the specific creditors involved.

                          OK, let’s review:

                          * You can file Chapter 13 bankruptcy and restructure the debt under a 5-year court-supervised plan where you pay monthly on a fixed pace.

                          * You can take the Long-Term Method and stretch out your settlements over 3-4 years, and get sued into Chapter 13 bankruptcy anyway.

                          * You can adopt the Fast-Track Debt Settlement™ strategy and be debt-free in 12 months or less.

                          Rather a “no-brainer,” isn’t it?