More than 189 million Americans have credit cards, and it seems that accumulating debt is a part of life. What if you were in a financial bind, and you wanted to write it off? Could a debt settlement agreement be a solution?
The answers are conflicting. Some say a debt settlement agreement can resolve your debt for pennies on the dollar. Others inform about the consequences. Below are some facts that you should consider before making a payoff.
Is it bad to take a settlement on debt?
Debt settlement is a practice that allows you to pay a lump sum to resolve your debt. Most of the time, creditors will agree to a lower amount in exchange for a quick payoff.
People generally use a third-party to make the arrangments, and that is where debt settlement becomes complicated. The third-parties do not offer their services for free. If someone was having trouble with their debt in the first place, a third-party makes handling finances that much riskier.
How much tax do you pay on forgiven debt?
Did you know that the Internal Revenue Service considers forgiven debt a source of income? That means you will need to pay taxes on it. There are exclusions, however, you can only use the exclusions after you apply the exceptions. It involves a skilled tax preparer and a lot more paperwork.
Many people are unaware that creditors report the forgiven debt to the IRS. More than 4 million taxpayers received a 1099-C tax form last year. Don’t let taxes on a debt settlement agreement surprise you. Prepare in advance, as you would any other payment.
What about the IRS Debt Forgiveness Program?
Fortunately, the IRS also has a debt forgiveness program. An offer in compromise allows you to settle your tax debt for less than the full amount you owe. When applying, the IRS will consider your unique circumstances, including your ability to pay, income, and asset equity. Please note, you are not eligible if you are in an open bankruptcy proceeding.
Can you settle student loan debt?
You may be able to settle student loans, but it usually has to be in default. Also, lenders require a significant payoff amount before they agree. If you owe $40,000 in student loan debt, a settlement of anything less than 75% is rare.
In exchange for debt forgiveness, lenders want their cash quickly. If you aren’t able to keep the terms of the new agreement, your financial situation could become much worse.
A use a debt settlement agreement with caution
You should use a debt settlement agreement as a last resort. The cases usually result after a borrower is in severe payment default. It’s necessary to protect your credit score, so never default your loan on purpose. Additionally, keep in mind that third-parties will want to take their share.
Before making any financial decision, remember to do your homework. You don’t want a consequence, such as fees or taxes, to catch you off guard.