Debt Settlement – Realistic
Expectations
It never fails to amuse me to hear critics of debt settlement
warning those who are considering this form of debt relief that
they may be facing a tax liability as a result of canceled
debt. Even funnier are the warnings about the effect that debt
settlement will have on your credit score.
Why do I find this amusing? Well, apparently these so-called
“experts” have never been in a situation where they’re forced
to choose between bankruptcy, debt consolidation, debt
settlement or consumer credit counseling. When you’re faced
with tough financial decisions, and you’re unable to make ends
meet, the last thing you should be concerned with is your
credit score. Rather, it’s time to find a solution to put your
debt and sleepless nights behind you.
If you’re contemplating debt settlement, but have heard some
negative feedback you may have some legitimate concerns. That
being said, please understand that your concerns relating to
debt settlement should lie strictly in the area of some debt
settlement firms out there who want nothing more than to take
your money and provide little to no service. This should be
your number one concern, not your credit score or tax
liability. We’ll talk more about debt settlement firms in a
moment, but first let’s take a look at those factors which seem
to have the critics so concerned.
Will you have a
tax liability if you should decide to seek relief through
debt settlement? You may or may not. Creditors are required to
report all canceled debt over the amount of $600 to the IRS,
and you will be required to report that canceled debt as
income, and will likely be provided a Form 1099 from each
creditor from whom you have received relief in the form of debt
settlement. Keep in mind, however, that an “insolvency” rule
exists for individuals who are considered insolvent at the time
they settled their debts. This means that if your liabilities
exceed your assets at the time of each settlement with your
creditors, you are classified as insolvent, and will not likely
face a tax liability. I highly recommend that you talk with a
professional tax advisor to see where you stand with regard to
the insolvency rule. Even if you are faced with a tax
liability, what’s the big deal? Owing taxes due to debt
settlement is simply because you realized a savings, and no
doubt you’ll be much further ahead than would be the case if
you remained thousands of dollars in debt, barely keeping your
head above water each month.
As for your credit
score, again, I don’t quite understand why this would be a
concern. You’re in debt, you’re losing sleep and you don’t know
how you’ll do it from one month to the next. Why worry about
your credit score? One of the major perks of good credit is to
obtain more credit – I think you’ll agree that you probably
don’t want or need anymore credit at this particular time. Put
your debt behind you and then start thinking about your
credit
score. In any case, the impact on your credit score
through debt settlement is only temporary, and most people
see a much improved score within 6-9 months of completing a
debt settlement program. As a matter of fact, I talked with
a former client just seven months after she paid off her
final settlement, and she already had a 712 credit score. I
also talked with another client eight months after
completing our debt settlement program, and her score was
681. Not bad, considering that if these clients
had not chosen to negotiate with their creditors they
very likely would still be borrowing from one credit card to
pay another, and the cycle could have continued for several
more years.
Some critics wonder what the actual savings through debt
settlement really is, considering that interest and late fees
continue to accrue prior to reaching a settlement agreement.
Well, in most cases people do realize a significant amount of
savings – even after late fees and interest, tax liabilities
and debt settlement firm fees. Let’s say, however, that you’re
$50,000 in debt, enter a debt settlement program and in the end
(after paying taxes and professional fees) you only end up
saving $15,000 - $20,000. So what? You still saved a lot of
money. You’re no longer paying minimum monthly payments, which
could take up to 40 years to pay off. You saved thousands and
thousands of dollars in interest that you would have ended up
paying had you decided to continue making your monthly
payments. You’re out of debt much sooner than you would have
been if you had chosen another path. And best of all, you’re
out of debt – period.
So, as you can see, debt settlement in itself is not
necessarily the evil that some people would like you to believe
it is. Some debt settlement firms, however, are. Because of
this it’s very important to properly research this area prior
to hiring a firm to represent you. First, please check the
Better Business Bureau record of each company you’re
considering. After you’ve narrowed it down, talk to those
remaining companies and find out how their fee structure works,
and if it sounds like they can be trusted. If a company you’re
considering wants their fee up front – prior to providing a
service – move on. It may take some extra time, but you
can find reputable
firms that will not charge you a fee until they have reached
satisfactory results.
Hopefully I’ve cleared up some misconceptions about debt
settlement for you. If you have additional questions regarding
debt settlement, please
click
here.
Congratulations on taking the first step toward a
debt-free lifestyle.
If you should have any questions, or need assistance, feel free
to contact
us. For a free
consultation, click here. Remember, Donaldson Williams, Inc.
charges absolutely no monthly fee and no set-up costs
because we work on a contengency basis, and you don't pay a
fee for our services until after a satisfactory settlement
has been reached with your
creditor(s).
Debt Settlement
and Income
Taxes
A very large number of people find themselves owing thousands
of dollars to credit card companies and as a result, searching
for viable options to successfully eliminate their debt in
order to avoid a bankruptcy filing. Debt settlement has become
a very popular alternative to bankruptcy amongst scores of
individuals – especially since the bankruptcy laws changed back
in October 2005. As you may know, debt settlement is a process
which enables debtors (consumers) to negotiate a reduced
pay-off balance (normally 50% or less) with their creditors.
When the agreed-upon settlement amount is paid, the remaining
balance is forgiven, and no further debt is
owed.
When creditors agree to settle an account for less than what is
actually owed, they are required by the IRS to report any
forgiven debt over the amount of $600 on Form 1099. The
potential of facing a tax liability resulting from debt
settlement can be unnerving to a good many people, including
consumers, as well as some debt counselors. On the other hand,
an equal amount of people have difficulty understanding this
train of thought, and feel that the possible tax consequences
of debt settlement shouldn’t play a major role in whether or
not one should choose debt settlement to free themselves from
debt.
If you should owe taxes on the amount of your forgiven debt,
it’s simply due to the fact that you saved a significant sum of
money. Because of this it seems that it would be common sense
to realize that the total amount of money you paid to your
creditor, in addition to the income tax liability, would still
be a great deal less than what you would end up paying if you
were to continue making the minimum monthly payments on your
accounts each month. As a matter of fact, it’s more than likely
that the interest you would end up paying to a creditor over a
period of years would easily exceed the taxes for which you may
be liable, as a result of settling your debt.
There’s also a strong likelihood that you may not be required
to pay taxes on your forgiven debt if you’re able to prove that
you were “insolvent” at the time you settled your debts. In
order to be classified as insolvent it is required that have a
negative net worth, meaning your liabilities must exceed your
assets.
Now, if this is not the case, and you don’t qualify for an
insolvent classification, obviously you may owe at least
something to the IRS. If you believe this to be so, it’s
important to talk with a tax professional prior to the April 15
tax deadline so that you may obtain proper advice pertaining to
your particular situation. If you simply don’t know where you
stand regarding the insolvency rule, it’s a good idea to
carefully review IRS Publication 908 for additional
information.
In the end, it’s your bottom line that should matter most. If
you’re buried in debt and considering
debt settlement
to eliminate your financial struggles, the
possibility of a tax liability shouldn’t be a deterrent. You
see, if your ultimate goal is to be debt-free, it’s crucial to
do your homework so you can better understand that the positive
end result of settling your debt may easily outweigh any taxes
for which you may be liable.
If you should have any questions, or need assistance, feel free
to contact
us. For a free
consultation, click here. Remember, Donaldson Williams, Inc.
charges absolutely no monthly fee and no set-up
costs because we work on a contengency basis, and
you don't pay a fee for our services until after a
satisfactory settlement has been reached with your
creditor(s).
Debt Settlement and Your Credit
Rating
If you’re considering debt settlement due to the
fact that your monthly credit card payments are out of
control you may be asking yourself how your credit score
will be affected as a result of debt settlement. Rather than
being concerned with your credit score, however, you may
want to consider the seriousness of your current financial
situation and re-prioritize. You see, if you’re losing sleep
and can’t seem to shake the nervous feeling in the pit of
your stomach due to the fact that you’re barely making it
through each month, your concerns may be better directed
toward finding a solution than attempting to hold on to an
acceptable credit score.
Realistically speaking, if you’ve sacrificed,
struggled and robbed Peter to pay Paul each month just to
keep a decent credit score, has it been worth it? Probably
not. If you should happen to enter a debt settlement program
and the result is a temporary less-than-perfect credit score
I seriously doubt that you’ll lie awake at night giving this
a great deal of thought. Those sleepless nights will likely
be a thing of the past once your credit card debt is once
again manageable.
As a matter of fact, your credit score may not even
be affected as a result of debt settlement, depending on the
current status of your various credit card accounts. If
you’ve made a few late payments already, and if your credit
card balances are quite high or “maxed out,” your credit
rating may already be somewhat reduced. In any case,
negotiating reduced settlement agreements with your
creditors will result in your accounts reflecting zero
balances, which will assuredly increase your credit score in
time, and save you thousands of dollars – providing you with
a debt-free lifestyle within two years – and very possibly
much sooner.
Making the decision to attempt debt settlement is
difficult, but can bring much relief. Once you’ve made the
decision to do so, it’s extremely important to hire a debt
settlement company you trust. Use your common sense, and if
something just doesn’t seem “right” when you’re speaking
with a debt settlement professional, do not allow yourself
to be forced into hiring that particular firm. It may be
easier said than done, but you’ll want to be sure to hire a
firm whose Better Business Bureau record is spotless, and
whose fees are not outrageous and taken up front. Customer
service should also be a number one priority; your money is
very relevant and you’ll want assurance that your questions
and concerns will be answered promptly and
professionally.
What’s most important when making the decision to
settle your debt is making the decision based on what’s most
important to you. If you’re willing to forego a good credit
rating temporarily in exchange for a debt-free lifestyle and
sleep-filled nights, debt settlement is definitely an option
you may want to consider.
If you should have any questions, or need assistance, feel free
to contact
us. For a free
consultation, click here. Remember, Donaldson Williams, Inc.
charges absolutely no monthly fee and no set-up
costs because we work on a contengency basis, and
you don't pay a fee for our services until after a
satisfactory settlement has been reached with your
creditor(s).
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