Debt relief, debt adjusting, or debt settlement services are often offered by companies that claim that they can negotiate with your creditors to reduce the amount you owe. Aside from the fact that there are many caveats, it is essential to remember that debt forgiveness may come with certain tax consequences. If the creditor forgives a portion of your debt, it could be counted as taxable income on your federal income taxes.
It is best to seek legal advice before agreeing to work with any debt settlement company with these things in mind. Consider all of your options, including negotiating directly with the debt collector or creditor or filing for bankruptcy instead. A trusted Oregon bankruptcy attorney can explain the pros and cons of your legal options and explain how a forgiven debt can affect your federal income tax.
Debt Relief Solutions
Debt relief solutions are often advertised by companies who claim that they can settle, renegotiate, or in some way change the terms of debt with a creditor or debt collector. Dealing with debt settlement companies is often confused with debt consolidation, but the two have significant differences and risk levels.
The term ‘debt consolidation’ refers to a process of taking out a loan at a relatively low interest rate and using the borrowed funds to pay off debts with high-interest rates. Considering its original meaning, consolidating debts enables a debtor to replace multiple monthly bills with one predictable monthly payment. This can save you money by reducing the interest you pay over time and simplifying your bill-paying and budgeting routines.
Debt consolidation is often preferred over the services offered by debt relief companies. They often make payments to creditors on your behalf through the single monthly payment made to them.
Things to Consider When Looking Into Debt Relief Solutions
It is crucial to exercise due diligence before dealing with debt relief companies that promise unrealistically huge savings by renegotiating debt with creditors. Your credit report is subject to considerable risk in some cases, but you could still face financially unfavorable circumstances. You may consider many options to get your debts under control, but for some people, debt relief services are not advisable.
In general, credit scores are significantly affected when entries in your credit report are new. Most of the time, before debtors consider debt relief, their credit reports have already been negatively affected by late or missed payments. The severity of their impact will depend on the nature and number of negative entries and how high your score was before you began struggling with debt repayment. While your credit score will gradually improve, some of the entries will stay for several years.
Alternatives to Debt Relief Services
While some people are indeed able to reach their goals through debt relief companies, there are other ways of dealing with your secured and unsecured debts.
There is a small number of debt management programs offered by non-profit debt management organizations. Some volunteer credit counselors can help you organize your budget and take control of your debts.
Others may even work with your creditors to develop extended repayment schedules or interest rate reductions that can help you pay your debts in full. These, however, would involve paying off what you owe, and these organizations may be loaded with cases.
Meanwhile, having a balance transfer credit card is a somewhat less risky version of debt consolidation. This involves moving debt from one or more high-interest credit card accounts to a lower interest card account, particularly one with a 0% introductory annual percentage rate (APR) on balance transfers. The catch, however, is that such a card would require good credit, which you might no longer have. Additionally, failure to pay off your balance transfer within the introductory period could lead to unwanted fees and interest charges.
In many cases, the best option to deal with overwhelming unsecured and secured debts is to file for bankruptcy. Due to automatic stay, it is a reasonably quick way to get rid of the stress brought about by constant calls and letters from debt collectors. Additionally, while a Chapter 7 bankruptcy petition can remain on your credit report for several years, its negative effect lessens over time. The eventual rebuilding of your credit and borrowing power can be difficult but not impossible.
Seek Legal Help from Hands-on Oregon Bankruptcy Lawyers
Debt settlement can get expensive due to the fees that debt relief companies charge. Additionally, if a settlement company succeeds in having your debt forgiven. In that case, your debt may be treated as income for purposes when calculating your federal income tax. You could end up paying at least a portion of a forgiven debt to the IRS, depending on your earnings, deductions, and tax bracket.
If your income and other financial circumstances make it almost impossible for you to pay even renegotiated debts, filing for bankruptcy may be your only choice. Here, a reliable Portland bankruptcy law firm can help. Consult with a dedicated Oregon bankruptcy lawyer at Northwest Debt Relief Law Firm today.