Because debt settlement will not work for everyone, here are a few qualities that make someone a good candidate.

• You owe $10,000 or more

• You have a lump sum of money available to settle your debts (from a friend or family member, a loan, savings, etc.), or the ability to pay a large amount into a trust account on a monthly basis to be used to settle your debts once enough is saved.

• Your debt is mostly unsecured debt, meaning there is no collateral involved. This kind of debt – credit cards, medical bills, bounced checks, etc. – work better for debt negotiation.

• You have an explanation for high debt that you cannot pay. Maybe you lost your job, faced a family emergency or death. Or maybe your interest rate was raised, or other fees were added to your debt.

• Most importantly, you have a strong long-term commitment to becoming debt free. Debt settlement is not usually a quick process, and if you are not willing to commit to financial discipline during and after your debt settlement, you may find yourself in a situation far worse than when you started.

The truth is in most cases it is better to use the services of a professional debt reduction attorney to help you settle your debts for much less than you owe. Steve Craig is a colorado debt reduction attorney who can assist you in getting a favorable settlement of your debts.

Typing the keywords “debt settlement firm,” or, “debt settlement lawyer,” or simply, “debt settlement” into an Internet search engine will provide you with more websites than you could possibly peruse. There are thousands, upon thousands, of companies and firms out there offering to solve your debt problems. And because the industry is unregulated, there is no simple way to determine if a company is credible or not. So how do you sift through them all to find the one that is right for you?

Debt Settlement Debt Reduction Eliminate Debt

Naturally, there is no easy answer, but there are a few key things to look for to sort out the reputable firms and companies from the scams.

For example, check if the company you are considering is a member of the Better Business Bureau (BBB) and the chamber of commerce. Often if the company or firm is a member of these, it will advertise it on its website, flyers, or in its office.

Along the same line, check how long the debt settlement company or firm has been in business. The longer it’s been around, the more experience it has, the stronger its relationships are with the creditors and banks you owe money to, and the more credible it is.

Also, make sure the plan they offer you will have you paying off your debt within two years. A longer time period means you will be paying more in interest, and you are much more likely to be sued by creditors.

Make sure the company or firm has a thorough understanding of your debt situation before they approve you because not all types of debt can be settled or negotiated.

Finally, make sure that it is easy to get a hold of your company or firm. If communication is difficult in the early stages of setting up a debt settlement, imagine how stressful that could become if problems arise!

Honest, reliable, and hardworking firms and companies are out there, just remember it might take some research to find them.

What are the tax consequences of credit card debt settlement? What is the tax impact to you when you negotiate a debt? Will I get a Form 1099 after settling a debt? Are there any tax reporting rules I should be aware of with respect to debt settlement? Yes, there are. Before you sign up with a debt settlement program, you should know the tax consequences of your actions. You should consider getting an opinion from your CPA before you start. If you do not have one, or your CPA is not familiar with the tax consequences of debt negotiation, please call me and I will give you the name of someone who does. Do not rely on anyone’s statements regarding tax consequences of settling debt (including this blog), other than a CPA.

That disclaimer made, here is the basic rule:

The amount you save in a debt settlement is not taxable if you have a negative net worth at the time of the settlement. If you have a positive net worth at the time of the settlement, it is taxable. You will receive a 1099-C (”C” stands for “cancellation of debt”) for all debts settled. In my experience, most of the clients we have settled credit card and other debts for had a negative net worth. But there were a few that had a positive net worth. So total up your debts. Then total the net value of your assets (so for your home, you take the fair market value and then subtract the mortgage and cost of sale if you were to sell it.) If your debt exceeds your assets, you are insolvent. If you have any doubt, call me, or get an opinion from your CPA.

This is called the “insolvency” exception to the general rule that cancellation of debt is taxable. You are insolvent to the extent that your liabilities are more than the fair market value of your assets immediately prior to the debt settlement. So you will need do a personal balance sheet of your assets and your liabilities. There are 2 forms that your CPA will file with your tax return. The first is form 982 and the second is your personal balance sheet.

There are more complex issues with respect to income tax ramifications of negotiating a debt. For example, IRAs and 401k holdings may not count toward your asset total for these purposes (this is very good news!). In other cases, some of your settlements may not be taxable (up to the point you become solvent), and then the rest will be. If you would like to discuss your situation with me, please call me at 303-520-3414. In many cases, our clients have been pleasantly surprised to find there is no tax liability.

Are attorney fees on debt settlement tax deductible against this income?  Yes.

Stephen Craig is a debt settlement attorney in Denver who works exclusively for individuals and small businesses in debt.