The Downsides of Debt Settlement
Deciding to settle your debt directly with a creditor is an easy choice if your other option is filing for bankruptcy protection. A bankruptcy case is a legal dispute where you are a litigant; you only get the financial relief that the court awards you, and you must pay the filing fee without knowing how much relief you will get. Besides, the record of the bankruptcy filing stays on your credit report for seven years or more, and it resets the clock for when you can file for bankruptcy again, so that bankruptcy will not be an option as a solution to another financial crisis that might emerge in the next few years. Settling directly with a creditor involves less invasion of privacy and less bureaucratic red tape, and it is faster and less expensive. When you settle a debt, you and the creditor agree on an amount that you must pay so that the creditor will consider your obligations fulfilled, even though it is less than the current outstanding balance. Once you pay the settlement amount, the creditor forgives any other amounts you once owed. For example, you might owe $4,000, but the creditor agrees to settle your debt if you pay $2,000. You and the creditor sign a settlement agreement, and then you pay. It feels like a win, but debt settlement can create new financial problems even as it solves old ones. For help seeing the big picture about debt settlement, contact a Boca Raton debt lawyer.
What Does Debt Settlement Do to Your Credit Score?
Discharging a debt shows up on your credit report. The record stays longer if you discharged the debt in bankruptcy court than it does if you settled the debt directly with the creditor. This negative mark is not the only detrimental effect that debt settlement can have on your creditworthiness, though. Most creditors will only settle a debt if you pay the settlement amount in a lump sum. To do that, you might have to skip payments on some other bills, racking up late fees and credit score damage along the way. Your credit score will go back up as you continue to pay your bills, but if you try to borrow again in the near future, lenders will charge you higher interest rates because of your troubled credit history.
What Does Debt Settlement Do to Your Tax Obligations?
Settling a debt can also make your taxes more expensive. Any amount that a creditor forgives in a debt settlement agreement counts as taxable income in the view of the IRS. In the above example, if a creditor forgives $2,000 of debt pursuant to a settlement agreement, the IRS counts this toward your income, so if you earned $35,000 in employment income during the year, the forgiven debt makes your taxable income $37,000, meaning that you could get a smaller tax refund.
Work With a Debt Lawyer About Settling Your Debts
A South Florida debt lawyer can help you make wise decisions about settling debts out of court. Contact Nowack & Olson, PLLC in Boca Raton, Florida to discuss your case.
Source:
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