The dangers of using a Debt settlement company may well leave you in more debt and worse shape than when you started dealing with them. Most debt settlement companies ask you to stop paying on your bills and collect funds required for a settlement. This brings down your credit score right away and can also cause the creditor to file a lawsuit while you are putting money aside. And if you stop making payments on a credit card, you will be hit with additional interest charges and late fees thereby raising the amount you owe.
1. The settlement will show on a credit report and has a negative impact on your credit rating which can result in bringing down your credit score.
2. There could be tax consequences for debt forgiveness. If a portion of your debt is forgiven by the creditor, it may be considered as taxable income on your federal income taxes. Don’t overlook the consequences as this could reduce the amount that you save.
This is due to the rule that a settlement for which the forgiveness of debt is greater than $600 becomes a taxable event,” “If somebody were to settle a $14,000 debt for $8,000, the $6,000 which is not paid becomes taxable.”
For questions on this topic – refer to IRS Publication Form 982 which discusses the taxability of forgiven debt. Typically the creditor will send the IRS a 1099-C tax form if more than $600 in debt is forgiven.
There is an exception which you need to discuss with your accountant or tax adviser. If you were insolvent at the time the creditor forgave the debt, there are exceptions to the debt forgiven being classified as taxable income. Being insolvent means that the amount of a debtor’s debts are greater than his/her assets.
3. While the numbers are still on your side, remember that a bankruptcy will have no Cancellation of Debt consequences. This is true even if you elect to return a home, car, or other secured property to the lender as part of your bankruptcy.