The mystery behind phantom debts

When consumers find themselves overwhelmed by debt, they need not despair. Various debt solution options exist to help consumers regain their financial footing and begin rebuilding their financial foundation. However, a phenomenon known as phantom debt is causing consumers stress that they do not deserve. Essentially, phantom debt exists when a lender demands payment for a debt that has been forgiven, consolidated or paid off.

Last fall, The New York Times profiled the story of a couple who was being haunted by phantom debt. Essentially, the couple had filed for bankruptcy and several of their debts had been legally forgiven. However, three years post-bankruptcy, the couple began receiving letters from lenders attempting to forgive debts that had been wiped out years before.

This kind of occurrence is happening with greater frequency in the wake of major bank settlements with the federal government and various state governments. In order to honor their settlement terms with these governments, banks guilty of negligent lending practices are now bound to help clients who are struggling with their mortgage debts. However, many are failing to help owners who are currently struggling and are reaching out to "help" homeowners who have already been the target of debt lawsuits and foreclosures that were settled long ago.

To be targeted for assistance by a lender who had previously failed to work with you to right your situation is an odd kind of harassment. In addition, the unacceptable creation of phantom debt is causing many Americans to struggle with complicated tax issues. If a bank forgives debt, even if that debt no longer exists, the IRS could consider that debt to be taxable income.

If you are struggling with the odd paradox of phantom debt and it is affecting your ability to file for other debt solutions or your ability to properly file your taxes, please consult an experienced attorney who can advise you on your situation.

Source: New York Times, "How to Erase a Debt That Isn't There," Gretchen Morgenson, Sep. 29, 2012