This article helps you understand:
- The risks associated with debt settlement companies.
- Some of the tax implications that are associated with debt settlement.
- If debt settlement is right for you.
What Are The Risks Associated With A Debt Settlement Company?
Some of the several risks that come with signing with a debt settlement company are:
A continuation of collection activity, including:
- A lien against your assets.
Additionally, debt settlement companies are known to take their time – resolution timetables are much longer than with a debt settlement attorney. Debt settlement companies prioritize themselves over you and may not start working on your behalf for 12 to 24 months until their fees are collected.
Can A Creditor Still Garnish My Wages Or File A Lawsuit Against Me If I Am Working With A Debt Settlement Company?
A creditor can still garnish your wages or file a lawsuit against you even if you work with a debt settlement company.
Debt settlement companies collect their fees – requiring you to put funds into a savings account – before they start settling your debts. During these 12 to 24 months, creditors may decide to file a lawsuit against you and obtain a judgment. Once they obtain a judgment, your wages or bank account could be garnished.
How Much Information Do You Require From A Client To Determine If They Are A Suitable Candidate For Debt Settlement?
Our practice takes a simple approach and only asks for the necessary information when determining if they are suitable for debt settlement. We ask you for the total amount of your debt, along with a list of your debts.
If facing a lawsuit, we ask what the amount of the lawsuit is, the creditor’s name, and the opposing counsel’s name. These three pieces of information help provide focused options to someone considering debt settlement.
What Are The Tax Implications For Settling Debt?
Once you settle a debt, it will remain on your credit report for seven years. After debt settlement the creditor is required to file a 1099C statement with the IRS and issue you a copy. The amount of settled debt is considered by the IRS as taxable income to you at your tax rate. For example if you settle a $10,000 debt for $6,000, then the $4,000 difference can be taxed as income. I am not a tax advisor, you must consult your tax advisor to understand the tax implications of debt settlement.
Is Debt Settlement Right For Every Debtor?
Debt settlement is not right for everyone. It is right if:
- You want to avoid bankruptcy;
- You want to repair your credit;
- You have grounds to repay a lower amount of a particular debt.
You may have debt that was charged-off a year, even five years ago, that you can still settle even though the statute of limitations for collection has expired. The benefit of settlement even after the statute of limitations has expired is that you can repair your credit and resolve any security clearance issues for your employment if you need to maintain a security clearance. If you decide to settle this debt, a debt settlement attorney could help you contact the creditor and resolve the debt for a significantly lower amount. Debt settlement can position you to repair your credit.
For more information on Debt Settlement Companies & Tax Implications, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (240) 539-9393 today.
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Former Chapter 7 Trustee