Debt settlement is a great way to settle your existing debts without causing any harm to your credit score. If you can go through the debt settlement procedure properly while following every guideline, the debt-to-income ratio would improve astoundingly. Look at it anyway and you would figure out that the effects associated with the settlement process would be far less damaging in comparison to what you get through bankruptcy. If you stay current on car payments and mortgage, your score would definitely improve a lot.
Understanding the Tax Consequences
Any financial institute must report situations of canceled debts over an amount of minimum 600 USD (it is basically that portion being forgiven through settlement transactions) to the IRS. At the same time, the debtor needs to report it as an income on the tax return. But, then, it would depend entirely upon the IRS to take the decision. Whether it would permit you to offset any kind of income through the canceled debts or not, depends entirely upon the IRS. In most common circumstances, the IRS would permit the debtor to offset any earning through canceled debts up to a total amount that the debtor is insolvent during the time when debts are canceled. You can be declared as INSOLVENT if you have the condition to owe more than you own. In short, if you possess negative net worth, you would be declared as INSOLVENT.
Remember, if you are deeply burdened by heavy debt, there is a strong chance that your net worth may not be positive. So, in that case, the chances of paying taxes on forgiven debt balance amount is very minimal, although there can be exceptions. Such exception can well be for an individual who possess high-level of home equity. This kind of situation can make the entire net worth get transformed into a positive status while eliminating the insolvency exclusion part. But, then, this is only an exception. You must not confuse it with any rule. According to debt settlement reviews, it could be a very likely circumstance for a debtor to owe tax on a forgiven debt balance. However, even in such situations, you shall still remain way ahead of the game through the debt balance elimination process in a faster way.
Creditors possess the legal rights to file lawsuit against debt obligation non-payment. However, such lawsuits are way less common in occurrence. There is big money involved to fight the case and file for the lawsuit. You must know that the results will never be fast. Time, money and effort all may get wasted in the slow proceedings. On the other hand, there also lies the litigation threat. That is why creditors always emphasize on debt settlement plans.
Worrying about your credit score while being burdened by strong debt is totally not correct. First, you need to improve your financial status and get the debts settled through proper, legitimate proceedings. Then, start new with a debt-free life.
About Author: Linda Spears is a debt settlement expert. She is a regular columnist for all the leading financial magazines and blogs in topics concerning debt settlement reviews.