Debt Settlement Fact and Fiction
What people say about debt settlement and what’s really true about debt settlement are two different things. If you’re seriously consider debt settlement as a solution to your debts, then you need to know how this strategy works and how it will affect you.
Debt Settlement and Your Credit Score
If you’ve read about debt settlement, you’ve probably also read about its impact on your credit score. It’s true that settling your debts will hurt your credit score, here’s why. First, you can’t settle accounts that are already current on the payments. You have to fall behind before you can settle debts. The late payments will hurt your credit score. The more accounts you fall behind on, the more your credit score will be hurt. Settling your delinquent debts, as opposed to paying them in full, will also have an impact on your credit score.
The good news is that the negative information will only be on your credit report for seven years and you can start rebuilding your credit score as soon as you pay off your debts.
You Will Owe Additional Taxes
Part of the tax rules say that you must pay taxes on cancelled debts. If the amount of your debt that’s cancelled is more than $600, that amount will be reported to the IRS and you’ll be expected to include it as taxable income on your income taxes.
There is an exception that allows you to avoid reporting cancelled debt as income on your tax return. If you are insolvent at the time you settled your debt, you don’t have to include the debt on your taxes. But, you do have to file Form 986 with the IRS showing that you were insolvent when the debt was cancelled. Insolvent means your debts outweighed your assets at the time the debt was cancelled. In other words, you had a negative net worth.
You Have to Be Delinquent to Settle Your Debts
This is true. Creditors only settle debts with customers who they believe are at risk of defaulting on payments. If you’ve been current on all your payments to date, the credit card issuer has no reason to believe you’ll default on your payments. If you tell them you intend to settle while your account is still current, you risk being sued for the debt.
Debt settlement is not a solution for people who just want to get out of paying their debts, but for those who are legitimately having trouble making their debt payments. In that case, you may have already fallen behind on your debt payments and your accounts could be in a stage that they’re ready to be settled.
Knowing what is and it not true about debt settlement will make it a little easier to decide if this is the strategy you want to move forward with.
Related posts:
- The Downside to Debt Settlement
- Benefits of Debt Settlement
- How to Choose a Debt Settlement Company
- Starting a DIY Debt Settlement Program
- Learn How Debt Settlement Works
- Debt Settlement Negotiations and Offers
- Debt Settlement DIY vs. Debt Settlement Services
- Comparing Debt Settlement to Other Debt Solutions
- An Overview of Consumer Credit Counseling
- Tips to Avoid a Debt Consolidation Scam
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Debt is slavery, and the goal of this website is to help you get debt free.
If you want to get out of debt, but aren't sure what your plan should be, then click here and read the debt consolidation plan.
If you're serious about getting debt free, sign up for the free debt course that will help you lower your minimum payments, lower your interest rates, and get out of debt faster.
Get the course here:
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