Received $7k in worker's compensation settlement, plus other $10k in assets after I pay off my defaulted credit cards (car, personal belongings, etc). I want to settle my defaulted credit cards for 50%, which forgives $18k. Do I still have to pay taxes in this amount if my assets are less than the debt? What about my workers comp settlement, should I count that towards my total assets?
Your workers' compensation settlement is tax free. The rest of your question appears better directed to the bankruptcy & debt practice area. I'll re-direct it there for you.
Typically to be considered for a reduction in amounts owing, creditors will want financial information from you such as the value of assets and income. From a bankruptcy standpoint, the 7k settlement and personal assets could be exempted from the bankruptcy estate using a couple of different exemptions such as the (d)(5) wildcard and workman's comp exemptions. Settling the debt with the creditors will likely result in taxable liability for forgiven debt while a Chapter 7 will not. I would consult with a local bankruptcy attorney to discuss your options and preserve as much of your settlement as possible.
You do not want to attempt to pay half your outstanding debt and then declare bankruptcy. That may be considered a preferential transfer. The right to receive your workers comp settlement is an asset that has to be properly listed. There may be a claim of exemption that you can make depending on all your assets. You will need detailed bankruptcy attorney advice regarding these issues. Feel free to contact a local bankruptcy attorney.
You should consider filing for bankruptcy. Debts forgiven (discharged in bankruptcy) don't give rise to a tax liability. Unless your assets are less than your liablities just before the settlement of the debts you would have to pay tax on the amount forgiven. Your assets sound like they would be exempt in a bankrutpcy case, and probably a bk would do no more damage to your credit than paying off the defaulted credit cards. You should contact a local San Diego bankruptcy attorney for a free consultation.
Steven Joseph AlvesWorkers' Compensation LawyerLos Angeles, CA ·
I believe any debt forgiveness over $600 is reported as income, but that has nothing to do with your workers' comp settlement. As for whether the settlement amount can be exempted from a bankruptcy estate, you should speak with a bankruptcy attorney.
Andrea WhitehillBankruptcy AttorneySan Diego, CA ·
You can most likely file a Chapter 7 bankruptcy (depending on your current income level) and keep all of your settlement, wiping out all of your credit cards. It is a lot cheaper than paying off half the debt. Talk to a local bankruptcy attorney about your options.
