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When you do not pay your bills, the credit card company usually gets after you about it. Eventually they will get the collection agencies involved if you do not respond to their inquiries. After it is all said and done, you may file for bankruptcy, or you may be able to negotiate some other form of payment that both you and your credit card company can handle.

But if, in the long run, you just cannot pay your debt, your credit suffers. Along with some form of punishment or another, you are no longer obligated to pay the debt. Around this time is when you may receive a 1099-C form.

What Is a 1099-C Form?

So you may be standing next to your mailbox looking over this form in your hands, wondering what it is, and what your credit card company wants to squeeze out of you this time. What does it mean when a creditor sends you a 1099-C form anyway? A 1099-C form is a form that basically states formally that your debt is forgiven.

What?

If you have owed money on your credit card, have resorted to the fact that you will never be able to pay it back, and go bankrupt or choose a similar escape, the credit card company will write your debt off. This means that the legally relieve you of that debt that you owe to them on your credit card. This 1099-C form is the legal document that states this to be true, giving you and they proof of the debt forgiveness.

What About the Money?

When you receive such a form, your debt, as we have established, is forgiven. However, because you bought things with this money and did not pay it back, you must count it as income. When you fill out your tax forms, you must include the amount of money that was part of your forgiven debt as income, because really, that’s what it is… free money to you.

Of course there are the prices you have to pay, so that in all actuality it is not free. Your credit reputation is damaged for a very long time, and any chances of you getting a mortgage or a large loan are very slim. You can, however, with credit cards and other forms of credit, build your credit back up to a descent number now so that when that penalty is removed from your credit report, you will have perhaps even better credit than you did before.

Paid in Full

If you end up settling your debt for a lower price than what you originally owed, the credit card company will accept less and still record that you “paid in full”. When this occurs, make sure that they do not report the remaining amount of debt to the IRS making you count it as income. If they report that you have paid in full when the debt paid was a smaller amount that the original, you still do not have to count that as income on your taxes, because they have accepted that as full payment rather than partial.

Getting a home loan when you have credit cards in collections is perhaps possible, but very difficult at any rate. No matter what your FICO score is, having outstanding debt that you have failed to pay prior to your home loan application will make the process very difficult. However, the higher your FICO score is, the better chance you have of getting approved for that loan, however slim that chance may be.

FICO Scores

The unfortunate thing is that your FICO scores will have probably suffered because of the fact alone that you have credit cards in collections. Many people get confused about the difference between a FICO score and a credit score, when in fact they are the same thing. Your credit score, or FICO score, is based on how well you have made your payments, therefore leaving you in quite a predicament if you have your credit cards end up in collections because you have not paid the bills on them.

What Does it Mean to Have Your Credit Cards in Collections?

Having your credit cards in collections basically means that you didn’t pay your bills on time, therefore you have the collection agencies on your tail about payments. This also means that you cannot spend more money on your credit card. Because you have not paid your bills on time to the credit card companies, it makes applying for a home loan more difficult because the lender will see that you have not been able to handle credit, so why should you be able to handle more, especially when it’s such a big thing as a home loan?

The fact that you have credit card companies or collection agencies after you about paying your bills cannot be hidden. The people you are applying for a home loan with will find out what other forms of debt you have hanging over you. Get out of debt, raise your credit score, and clean up your credit score.

Minimum FICO Score Required

The lowest credit score you could get away with and still get a home loan is around 580. However, that is to say nothing of your outstanding debt, like your credit cards that the collection agencies have seized. Any form of debt will make it more difficult to get a home loan because of the potential inability you may have to pay back the loan.

Getting a home loan is difficult in itself, because it is such a large amount of money that you must pay back. Creditors want to know that you will be able to pay back the money that you borrow in order to pay for this house that you are buying. If, in the future, you cannot, then they will almost always take your home from you. Having other debts, especially ones that are difficult to make payments on, will decrease the likelihood that you will ever be able to handle and make payments on a mortgage or other type of home loan.

What Is A Hardship Letter?

A hardship letter is something most companies will require to consider you for a “work out”. This is your opportunity to appeal to them to give you another chance. This should not be used to complain for what they have done or not done to make your situation worse.

This letter must be honest and represent the facts clearly. It must prove to them that the situation that caused you to fall behind is temporary and you are not in a position to make your payments on time.

You must also have a legitimate excuse for falling behind (which we shall discuss later) financial problems in itself would not be an adequate excuse. Remember, the hardship letter is only one piece of the workout.

The reality is lenders really don’t care what the person’s situation is; they simply want their money. The best option, however, is to contact the lender by phone and explain the situation so as to learn what the lender’s policy is in such matters.

A letter will likely get a response of “call this number” or something similar, if indeed there is a response at all.

If the party chooses to make the initial contact by mail the best thing is to keep it brief and to the point. Explain why it is not possible to comply with the original terms of the agreement, and request modification of the obligatory terms until your financial situation improves.

What Is Required In A Hardship Letter?

People understand that financial hardship sometimes occurs. None of us enter into a credit agreement knowing that at some point in the future we may have to back out or write a financial hardship letter.

A hardship letter is easy however; the hardship letter works with collection agencies in the event it has gone that far, where they will handle the process in exchange of accepting a small partial payment arrangement. If not, send it directly to the creditor that you first did business with.

Your letter needs to be sent to the collection agency (if they are involved) or to the original creditor to convince them to cut you some slack. The basis of the letter is anything that will prove why you are in the position you are in and why you are presently asking for help.

You must remember that hardship letters do not resolve your debts. And when you have completed your letter you must either fax the letter or mail it certified.

What The Letter Must Contain

Name: Your
Address: Your Address
Lender’s Name: and Your Loan Number or Identifying Information (other than name)

The letter should contain: the reason for default, an explanation of the hardship, the expected duration of the hardship, willingness to participate in a workout solution, desire to retain ownership (of what you have agreed or signed to with the lender).

Good Reasons

• Loss of Employment

• Medical Complications

• Disaster Victim

• Death

• Forced Relocation

• Disability

Poor Reasons

• You are a Student

• Legal Issues

• Filing Bankruptcy

• Overextended financially

• Pay Cut

• Purchased a Car

Basic letter breakdown: introduction, your offer to resolve your debt, your hardship situation, thanking them for their time, and your current contact information.