Beware of the Debt Settlement Trap

Creditors, particularly when trying to collect older credit card accounts that are in default, will often offer to accept less than the full amount, in exchange for prompt payment. But you should understand some of the risks of doing this

Debt Cancellation May Affect Your Income Taxes.

When a debt is cancelled, entirely, or partially, the IRS will count the amount that is forgiven as “cancellation of debt income.” This could cause an unexpected surprise at tax time.

There are a number of exceptions to this rule. Two important ones are discharge in bankruptcy, and insolvency. If a debt is discharged in bankruptcy, the IRS does not consider it taxable income. Additionally, if the debtor is insolvent, which means that their debts are larger than their assets, any cancellation of debt will not be taxed. To claim either of these exceptions, you should file a form 982 with your tax return. For more information, consult an accountant or your tax preparer.

Settling With One Creditor May Not Solve the Entire Problem

If you only have one creditor, negotiating a solution is often possible. But many of my clients have debts from numerous creditors. Settling with one creditor isn’t enough to solve a debt problem if there are other creditors waiting in the wings.

Alternatives to Debt Settlement

There are alternatives to Debt Settlement. Some older debts may be barred by the statute of limitations. There are other grounds for contesting debt collection lawsuits, particularly when the suit is filed by a debt buyer, or payday lender.

A Bankruptcy Discharge, in addition to avoiding the tax problem, can provide a fresh start – getting you out of all (or at least most) of your unsecured debts.

6 Trackbacks

Leave a Reply

Your email address will not be published. Required fields are marked *