Debt Settlement & Income Taxes -- What You Need to Know
Debt settlement has become a popular approach to resolving problem debts without having to file bankruptcy. With this approach, creditors agree to accept a portion of what you owe (usually around 50% or less) to settle the account, and the remaining balance is forgiven. This technique will certainly continue to grow in popularity now that the new bankruptcy law makes it tougher to fully discharge debts in a Chapter 7 bankruptcy.
As with anything, there is no free lunch, and creditors are required to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). Therefore, the possibility exists that you may owe taxes on the forgiven portion of the debt. For this reason, many financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you might end up owing taxes.
But the tax consequences of settling your debts are greatly over-emphasized, and this is a really just a minor issue at best.
First, even if you end up owing taxes on the canceled balances, that's because you saved a bunch of money off your original debts. The total of what you paid the creditor, plus the taxes, will still be much less than what you owed to begin with. There is still a net savings. So it's hard to understand why this is viewed as a problem in the first place!
Second, the great majority of people who settle their debts are not required to pay taxes on the forgiven part of the balance. That's because of the "insolvency" rule, described in IRS Publication 908, "Bankruptcy Tax Guide." Don't let the title fool you.
You don't need to have filed a formal declaration of bankruptcy to take advantage of the insolvency rule.
Basically, "insolvent" means that you have a negative net worth -- that is, you "owe" more than you "own." As a consequence, most debtors do not have a tax liability on the canceled debts, simply because most debtors are insolvent! It usually comes down to home equity. If you have enough equity in a home (or other property) to outweigh the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts. However, the majority of people in serious debt trouble have a negative net worth, and are therefore insolvent. The way it works is that you can offset the canceled debt up to the amount by which you were insolvent at the time you did the settlement.
Come tax time, be sure to get professional tax advice specific to your situation. Also, be sure to read the section in IRS Publication 908 on "reduction of tax attributes," which requires people using the insolvency rule to reduce their basis in such things as rental property, loss carryovers, etc.
Most of that probably won't apply to you, but again, get specific advice before winging it.
So, the message is, relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom.
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The Right Way To Credit Repair
If you have a bad credit rating, then you might find that your ability to get financing, loans, and even some jobs is greatly diminished. Once you have a bad credit rating, it might seem like there's nothing that you can do about it? but you don't have to believe that. It's not as difficult as you might think to get by with a bad credit rating; with a little work and time you can even repair it! Of course, before you do that it's important to realize exactly what a credit rating is. Every time a lender or other creditor makes a report concerning your payment history to them, this report affects your credit score. Your credit score is a numerical indication of the positive and negative reports that you've received from creditors and lenders; if the number is high then you have a good credit rating, and if it's low then you have a bad credit rating.
Basic credit repair Get organized! Make a folder for all your correspondence offline and online. You will have to do some snail mailing...
The Right Way To Credit Repair
Bankruptcy > The Right Way To Credit Repair
Legal Helpers Publishes Latest Article in Lecture Series About Credit Reporting Errors and How to Correct Them
Chicago, IL (ContentDesk) July 23, 2006 -- Legal Helpers released the second article in a series on credit reporting errors, the issues they create and what consumers can do about them. The article, which can be found at http://www.legalhelpers.com/credit-repair/credit-and-the-law.html, discusses the history of credit bureaus, how they evolved and explores the laws established by the federal government to help protect consumers from incorrect credit reports. The series is intended to create awareness of a growing issue that concerns every consumer regardless of the current state of their credit. A single error on a credit report could result in an increased point or two of additional interest which could result in hundreds if not thousands of dollars that the consumer should not have had to pay. Legal Helpers will continue the series each week.
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Legal Helpers Publishes Latest Article in Lecture Series About Credit Reporting Errors and How to Correct Them
Bankruptcy > Legal Helpers Publishes Latest Article in Lecture Series About Credit Reporting Errors and How to Correct Them
Katrina Casualties Could Speed Bankruptcy Of Social Security Benefits To 2008
Columbia, MD (ContentDesk)
October 20, 2005 -- At the rate of $3 million per month for every 498 individuals, as is being paid to survivors of 9/11, the Administration is on the hook for $4.4 billion per month - $52.8 billion per year- in disability benefits.The Administration now sends $100 billion a year to 10 million people.
Add to this the 15 million (20%)
out of 76 million baby boomers who will become disabled over the next 10 years, the inescapable conclusion is that the Administration will run out of enough workers to pay for the disabled and retiring 5 years sooner than the 2014 year previously forecast by the Government Accounting Office (GAO).
In a statement released in 2003, the Social Security Administration said that as of August of that year, monthly benefits are being paid to 498 individuals disabled by the terrorist attacks of 9/11, and 81 of their dependent spouses or children for a total of $3 million per month.
The Administration...
Bankruptcy > Katrina Casualties Could Speed Bankruptcy Of Social Security Benefits To 2008
Will Rod Stinson, Self-Made Multimillionaire & Top 20 Marketer, Do it Again?
Federal Way, WA (ContentDesk) March 9, 2006 -- Rod Stinson, a home based direct marketing entrepreneur spent the first 13 years of his working career as a machinist in the aerospace industry. He followed in the footsteps of his father who did it for 44 years. He craved change. After spending 4 years attempting his hand at the home based marketing industry, Rod found himself standing before a San Bernardino bankruptcy judge and lost his house, two cars, and even his wife's salon business. He became part of a growing statistic of 15 to 20 million Americans now trying to make money from their home.
Although the home based business direct sales industry has been around for 50 years, the sad commentary on the industry is that 97% of those who get involved fail; and many people these days are just 7 days away from bankruptcy. This means that if they miss a paycheck they are in serious financial trouble. For this reason many are trying to generate additional income with a home based...
Will Rod Stinson, Self-Made Multimillionaire & Top 20 Marketer, Do it Again?
Bankruptcy > Will Rod Stinson, Self-Made Multimillionaire & Top 20 Marketer, Do it Again?
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