[fred_durst]

Exactly. Buying your debt off for a penny on the dollar is probably the stupidest thing you could do financially. You would be trading $10,000 in credit card debt, with a fair amount of legal protections, for $4,000 in IRS debt with very few legal protections.

[dragonwriter]

> You would be trading $10,000 in credit card debt, with a fair amount of legal protections, for $4,000 in IRS debt with very few legal protections.

Forgiven debt is taxed as normal income, so you'd have to have a 40% marginal federal income tax rate to end up with $4,000 in IRS debt on $10,000 of forgiven consumer debt, which is an approximation of the maximum marginal rate being 39.6% (which kicks in at $400K income for a single taxpayer.)

I would hazard to guess that people that would be paying anywhere close to a 40% marginal federal tax rate aren't really sweating $10K credit card balances.

[derefr]

If you purchased a liquid asset with the $10,000 (and your creditors never found out about it in time to sue you for it), couldn't you just reliquidate it at that point and use it to pay off the IRS debt, leaving you with pure profit (and a horrible credit score)?

Actually, wait, maybe not even that: given that you purchased the debt, you could legally mark it (as the creditor) as having been repaid and then petition (as the debtor) to have your credit score corrected, no? This is what the http://rollingjubilee.org people are doing, at least.

[patio11]

Repaying negative status debts does not necessarily improve one's credit score. You can ask the credit reporting agencies to reflect the fact that you've paid it, but this is a no-op for virtually everything except mortgage applications.