Debt settlement is another debt solution. This solution involves negotiating with your creditors to pay a reduced amount to resolve the debt. Many people consider this option when they have no legal defenses to the debt or they are trying to avoid the Bankruptcy solution.
While I do assist clients with debt settlement, there are several drawbacks to debt settlement that you should be aware of before pursuing this debt solution.
Most people who negotiate with their creditor to accept less money than is owed on the debt do not realize an important fact about debt settlement. The IRS views forgiveness of a portion of a debt owed as income and you pay income taxes on it. Because you are now paying less than the amount owed, the IRS views this as a financial benefit or gain to you. The difference between what you legally owed the creditor and what they willing to accept is "income" to you.
The creditor is required to issue a 1099 statement to you the following January for the amount forgiven and it is treated as income. Many people who desire to settle debt do not understand this. The creditor has no interest in discussing this with you, as they have made a business decision to get something rather than nothing. They cannot promise you that they will not issue you a 1099 as they have no choice; they are required by the IRS to do so.
Be aware that forgiveness of large amounts owed can turn a dischargeable debt in a Bankruptcy case into a non-dischargeable tax obligation. When the amounts are small, this is sometimes not as important. But when creditors forgive $10,000 or $20,000 or more, this can quickly become a shocking event, leading to an even bigger problem than first existed. Know that debt discharged in Bankruptcy have no such taxable consequences.
IT DOES NOT REPAIR YOUR CREDIT
Another downside to debt settlement as a debt solution is that it does nothing to repair or fix your credit score. I have represented many people who settled some debt before they came to see me, thinking that they would see a bump up in their credit score once they settled the debt and paid a reduced balance. This is not the case.
When debts are discharged in Bankruptcy, the negative credit reporting stops and the effective of the entry of a Discharge Order is what heals your credit score, in a matter of a year or so. When debts are settled, they are often reported negatively for some time after the deal and without an entry of Bankruptcy Discharge, there is no event that clears up your credit report.
I have represented many good people, thinking they were doing the "right thing" by trying to pay their debts, even at a reduced amount; however, no good deed goes unpunished, as they say. The benefits they thought they receiving turned out to instead be a tax liability and no related healing of credit.
Before pursuing the debt settlement solution to resolve your debts, you must be informed of these two drawbacks and others that I would be happy to explain to you. Remember, everyone's situation is different and unique to them and I view my job as your Attorney to make sure you know the full scope of your debt solution options and help you decide which debt solution is best for you. Do not be fooled by high pressure debt collectors who tell you about all of the benefits of settling your debts, as they do not have your best interest at heart.