Beware of the tax consequences when settling credit card debts ...

Many of my potential clients ask before they hire me, can they settle credit card debts on their own. Sure you can, but do you fully understand?the full legal consequences of settling your credit card debts? Lets examine some of the elements of settling a credit card debt and the legal ramifications. First, unless your credit card debt is substantially aged ? meaning it?s in?collections, the credit card company most likely is not willing to negotiate with you. Why? They have been getting your money. Second, when they are willing to negotiate a settlement, they most likely want a lump sum settlement to settle the account in full. If you have some money to offer a lump sum offer, this sounds great ? right? Well, maybe. Let?s examine a quick hypothetical scenario. Say you owe XYZ Credit Card company $35,000. It has been in collections for a year and they are now willing to settle for a lump sum payoff of $7500. While this may sound great, please beware that the remaining balance of $27500 can be coming back at you the next year in the form of a 1099 tax on your income taxes. While you will?not owe the IRS $27500, you will owe the IRS close to $9,000 in this hypothetical situation. What makes matters worse, is that before you owed a creditor an unsecured debt which is hard for creditors to collect on in South Carolina, you now have a IRS tax debt that entails all the collection powers of the Federal Government.

Please note I am not saying do not settle your credit card debts. Some of the offers maybe too good to turn down. But don?t be surprised when you see a 1099 statement come in the mail during tax season. Are there any defenses to the 1099 statement? Yes. The IRS does have a form in which you can tell the IRS that you are insolvent and should not have to pay the 1099 income. The second defense is a bankruptcy. Chapter 7 or Chapter 13 bankruptcy will wipe out or discharge the debt.

Written by: Attorney Daniel Stone, Stone Law Firm, LLC

Source: http://danielstonelaw.com/beware-of-the-tax-consequences-from-settling-credit-card-debts/

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