I always find it funny when people who don't like debt settlement tell people who are thinking about it that if they get rid of their debts, they might have to pay taxes on the money they saved. Even funnier are the warnings about what will happen to your credit score if you settle your debts.
Why does this make me laugh? Well, it looks like these so-called "experts" have never had to decide between bankruptcy, debt consolidation, debt settlement, and consumer credit counselling. When you're having trouble making ends meet and have to make tough financial decisions, the last thing you should worry about is your credit score. Instead, it's time to find a way to get rid of your debt and stop losing sleep over it.
If you are thinking about debt settlement but have heard bad things about it, you may have some good reasons to worry. That being said, please understand that your worries about debt settlement should be limited to the few companies out there whose only goal is to take your money without doing much for you. This should be your top priority, not your tax bill or credit score. We'll talk more about debt settlement firms in a minute. For now, let's look at the things that critics seem to be worried about.
Will you owe taxes if you decide to settle your debts to get out of debt? You may or may not. Creditors have to tell the IRS about any cancelled debt over $600, and you have to report that cancelled debt as income. You will probably get a Form 1099 from each creditor from whom you got debt relief through debt settlement. Keep in mind, though, that there is a rule for people who settled their debts but were considered bankrupt at the time they did so. This means that if your debts are more than your assets when you settle with your creditors, you are insolvent and probably won't have to pay taxes. I strongly suggest that you talk to a tax expert to find out where you stand with the insolvency rule. What's the big deal if you owe money to the government? If you owe taxes because of a debt settlement, it's just because you saved money, and you'll be much further ahead than if you stayed thousands of dollars in debt and barely made it through each month.
Again, I don't quite understand why your credit score would be a problem. You're in debt, you can't sleep, and you don't know how you'll make it from one month to the next. Why should you care about your credit rating? One of the best things about having good credit is that it makes it easier to get more credit. I think you'll agree that you don't want or need more credit right now. Don't worry about your credit score until you've paid off your debts. In any case, debt settlement has a short-term effect on your credit score, and most people see a big improvement in their score 6 to 9 months after they finish a debt settlement programme. In fact, I talked to a former client just eight months after she paid off her final settlement, and she already had a 681 credit score. Not bad, considering that if she hadn't talked to her creditors, she would still be using one credit card to pay off another, and this could have gone on for a few more years.
Some critics ask what the real savings are when it comes to debt settlement, since interest and late fees continue to add up until an agreement is reached. Well, most people do save a lot of money, even after paying late fees, interest, taxes, and the fees of the debt settlement company. But let's say you have $50,000 in debt, join a debt settlement programme, and in the end, after paying taxes and fees, you only save $10,000. (which is not very likely). Then what? You still managed to save $10,000, which is a lot. You are no longer making minimum monthly payments, which could take up to 40 years to pay off. You saved a lot of money in interest payments that you would have had to make if you had kept making your monthly payments. You paid off your debts much faster than if you had taken a different path. And the best part is that you have no more debt.
As you can see, debt settlement is not always the bad thing that some people want you to think it is. Some debt settlement companies, on the other hand, are. Because of this, you should do a lot of research before hiring a law firm to represent you. First, please look at each company's record with the Better Business Bureau. After you've narrowed it down, talk to the companies that are left and find out how they charge and if they seem like they can be trusted. If a company you're thinking about wants to be paid before they do anything, move on. It might take a little longer, but you can find reputable companies that won't charge you until they've done a good job.
I hope I've cleared up some of your false ideas about debt settlement. If you have additional questions regarding debt settlement, please visit http://donaldsonwilliams.com/Debt Settlement.html. You've already taken the first step toward a life without debt.
