Bruce Bryen, CPA. Managing Partner The Snyder Group, LLC Printer Friendly Version

Debt Forgiveness and Its Ramifications

With all the financial problems in today’s economy, many dentists are smart enough to attempt settlement negotiations with their lenders and other creditors. There are many steps needed to reduce a debt and have the creditor accept a lesser payment than is owed. Thousands of dollars can be saved by speaking up during a difficult time and requesting a meeting to resolve a liability at an amount less than that on an invoice.

Why Would a Creditor Accept a Lesser Payment?
The threat of litigation is a reason that creditors may accept less than an amount owed. If a creditor has ever had a debtor balk at paying a bill, and has had litigation experience, the ability to settle could occur. Those who have not gone through a prosecution leading to a trial, have no idea what takes place.  A lawsuit is time consuming, expensive, and creates a tremendous loss of production on the creditor’s side as well as the debtor’s. A settlement of a debt that occurs quickly will save money, time and aggravation for the creditor and debtor. The legal fees incurred in attempting to collect a debt may outweigh the amount owed. Another reason for a settlement to take place without litigation is the amount of time that passes while the dispute is unresolved and no funds are being received on the creditor’s behalf. The ability for a debtor to delay a payment and to dispute the charge without the necessity of going to court can cause the creditor such a long delay, that a lower payment in satisfaction of a bill would be justified from a cash flow stand point. The fact that a long time customer would continue buying and paying the creditor under new payment terms would also be a point for the creditor to consider.

How Does One Begin Negotiating a Lower Payment?
One of the most important concepts in debt negotiations is the concept of honesty with the creditor. Once credibility is lost, by promising something that is not delivered, the ability to settle at a lower than outstanding balance is probably lost. If the creditor thinks that the truth is not being presented, why would the vendor, bank, or other type of creditor believe anything else the debtor might say? Don’t promise that the “check is in the mail.”  The truth that it probably isn’t will severely hurt the negotiations as they continue. If the truth is told, negotiations have an excellent chance of taking place with the resolution of issues and no reduction in credit rating or standing with the creditor. This will help immensely when the economy improves and cash flow is better. Don’t ignore the obligation and think it will go away.  Try to keep discussions ongoing so that no outsiders, such as an attorney for the cre ditor or a credit bureau reporting agency, enter the scene if at all possible. Once that happens, your time, costs and aggravation go up because your creditor’s costs would have just increased significantly.

Settlement has occurred. What are the consequences?
After a difficult period of negotiations, good news may on your doorstep. The settlement looks like it will occur. What are some of the consequences of the debt reduction? An example may be that if $200,000 was owed to a creditor and the creditor has agreed to accept $100,000, there has been a forgiveness of debt of $100,000. That is the good news. The battle is almost over. There is another provision to consider. What are the income tax consequences of the forgiveness of the $100,000 obligation? The IRS considers the debt forgiveness to be income to the debtor. It is termed “forgiveness of debt income.” What does that mean? It typically results in the imposition of tax at the rate the taxpayer would pay on all of his or her income for the year of the forgiveness.  Using the state of New Jersey as an example, and if the taxpayer’s rate was 6% for the state and 30% for the federal government, the tax would be 36% ( 30% federal plus 6% state) times the amount of the forgiveness of $100,000, or a total tax of $36,000.

In today’s economy, many creditors are expecting your call.  

Bruce Bryen, CPA has successfully assisted dentists with their personal and financial matters for more than thirty years. As a partner in The Snyder Group, he delivers creative and prudent financial strategies to help dentists build and protect wealth at every stage of their careers. His extensive expertise includes financing, debt restructuring, retirement planning and tax advising to help dentists keep more of what they earn. Bruce is also experienced in providing litigation support services and has testified on numerous occasions as an expert witness.

If you would like additional help or are interested in having Bruce Bryen speak to your dental society or study club, he can be reached at bruce@thedentistsnetwork.net  or at 1-800-988-5674.

Forward this article to a friend.