Debt Forgiveness and Portfolio Recovery
- Portfolio Recovery is a type of debt collector that purchases unpaid debts from original creditors. These creditors might include credit card companies and banks. After an account becomes several months past due, it's standard for original creditors to sell these accounts to recovery companies. Once Portfolio Recovery buys these delinquent accounts, debtors must make payment plans through the collector. This can include paying the full balance to settle the debt or negotiating a debt settlement with the company.
- Portfolio Recovery will work with debtors to rectify a past due balance. Understandably, some debtors cannot pay off their account balances in full. Rather than risk further credit damage and possible lawsuit or credit judgment, debtors can negotiate with Portfolio Recovery to settle for less than they owe. Debt settlement involves debt forgiveness. Because the collector accepts less than the balance, the company willingly forgives the remaining balance. For example, if a debtor owes Portfolio Recovery $10,000, but settles the account for $7,000, the collector forgives $3,000 of the outstanding balance.
- Debt forgiveness through debt negotiation can get rid of a high outstanding balance faster. However, anyone who willingly settles a balance with Portfolio Recovery or another debt collector should anticipate a higher tax bill. The amount of forgiven debt is income and subject to income tax. Using the above illustration, a debtor would pay income tax on the forgiven $3,000. Portfolio Recovery sends a 1099-C at the end of the tax year, and debtors must include this figure with their tax returns.
- Negotiating debt and having a collector forgive a percentage of the balance can avert lawsuits and credit judgments -- which lower credit scores and stay on credit reports for seven years. Understand, however, that debt settlements can hurt credit scores as well. Scores suffer because debtors were unsuccessful with fulfilling their obligation. Debtors can avoid credit damage by insisting collectors report the account "paid as agreed."