When looking for debt relief, it is important to do some research to figure out which of the several options is optimal for your situation. The Internet is a great source, but always be sure to check the credibility of a particular article or website. Here is a brief overview of the major debt relief options and whom they work best for.

Debt Consolidation Loan

In a debt consolidation loan, you use one loan to pay off various other loans or lines of credit. This loan will generally have a lower interest rate, as well as a lower monthly payment. The payment you make to this loan is distributed amongst your creditors. The most common type is a home equity loan, or second mortgage, in which your home is used as collateral. A debt consolidation loan takes several years to pay off, and you pay the entirety of your debts, plus interest. This debt solution works best for people who still have relatively good credit, resulting in a lower interest rate on this loan, and have substantial equity in their home. It is best for people who are only trying to get out of debt, not overhaul their financial habits. Of course if there’s any chance you can use the services of a debt reduction attorney, that is probably your best option.

Consumer Credit Counseling Services (CCCS)

In consumer credit counseling services, you have new and hopefully expert eyes take a look at your debt situation to offer advice and solutions. They provide different strategies for debt solutions, and take your entire financial situation into account, rather than just your debt. While they work with creditors to reduce your monthly payments, you still pay the full amount of your debt, and credit counseling also has a negative impact on your credit rating. Keep in mind that CCCS was originally established by credit card companies to help track down people who were not paying their creditors. CCCS works best for people with less than $10,000 in debt and have verified they are working with a reputable company.

Bankruptcy

Filing bankruptcy should definitely be a last resort. The two types of bankruptcy applicable to consumers are chapter 7 and chapter 13. In chapter 7 bankruptcy, your assets are liquidated and your debts are eliminated in one quick move. Only people with low income, few assets, and a demonstrated inability to pay their debts once their basic needs are covered, quality for chapter 7. In chapter 13 bankruptcy, you set up a program through a trustee in which you pay a portion of your debts in a plan that works for you. Chapter 13 bankruptcy is best for people with high income who are facing foreclosure or tax problems. Although bankruptcy seems like a quick and easy fix for debt, keep in mind that it remains on your credit record for 7 to 10 years

Debt Settlement

In Colorado debt settlement, you take a lump sum of money, or make high monthly payments into a trust account until you have a lump sum of money, which is then used by the firm or company you are employing to negotiate with creditors. You pay a portion of what you owe and are absolved of your debts. Although it affects your credit score negatively, most debt settlement programs are completed in less than two years, meaning you are shortly able to rebuild and recover your credit. Debt settlement works best for people with $10,000 or more in unsecured debt who have a lump sum of money ready to use, or who can make high payments into an account. It also works best for people who are willing to make a commitment to long term financial change. Again, if you have the opportunity to consult with a debt reduction attorney, that would be my suggestion. Steve Craig is a colorado debt reduction attorney who can help you settle your debts for pennies on the dollar as long as you have a lump sum to settle your debt with.

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.