Debt Relief Programs & Consumer Options Flashcards

What is 'debt validation' in the context of consumer debt relief?

Answer: A consumer's right under the FDCPA to request written proof that a debt is owed and that the collector has authority to collect it

Under the Fair Debt Collection Practices Act, consumers have 30 days from initial contact to request debt validation, requiring the collector to cease collection activities until they provide written verification of the debt.

Which federal law governs how much of a debtor's wages can be garnished by creditors?

Answer: Title III of the Consumer Credit Protection Act (CCPA)

Title III of the CCPA limits wage garnishment to the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage per week.

A client has $30,000 in credit card debt and enrolls in a debt settlement program. The settlement company negotiates the debt down to $15,000. What is the tax implication of the forgiven $15,000?

Answer: The forgiven $15,000 is generally considered taxable income and the creditor may issue a 1099-C

Cancelled debt is generally treated as taxable income by the IRS; creditors who forgive $600 or more must issue Form 1099-C, and the debtor must report the amount as ordinary income (insolvency exclusions may apply).

The 'insolvency exclusion' for cancelled debt income means:

Answer: A debtor can exclude cancelled debt from income to the extent they were insolvent immediately before the cancellation

Under IRS rules, if a taxpayer's total liabilities exceeded total assets (insolvent) just before debt cancellation, they may exclude cancelled debt from gross income up to the amount of that insolvency.

Which debt relief option is MOST appropriate for a client whose primary goal is to stop a home foreclosure and catch up on missed mortgage payments over time?

Answer: Chapter 13 bankruptcy

Chapter 13 allows debtors to cure mortgage arrears through a 3-to-5-year court-supervised plan while keeping their home, making it the primary tool for foreclosure prevention.

When advising a client about debt relief options, an ADRA agent should FIRST:

Answer: Conduct a full financial assessment of income, expenses, assets, and liabilities

A comprehensive financial assessment is the essential first step because it identifies the client's full financial picture, which determines which debt relief option — if any — is most suitable and beneficial.

Which of the following debts CANNOT be discharged in a standard Chapter 7 bankruptcy?

Answer: Federal student loans (in most cases)

Federal student loans are generally non-dischargeable in Chapter 7 bankruptcy unless the debtor can prove 'undue hardship' under the Brunner test, which is an extremely difficult standard to meet.