You do your best to look for methods you can you can try to get ahead of this—but how do you get ahead of an avalanche?
You call the hospital or the credit card company to ask about Debt Settlement and the representative says they will forgive half of your total balance if you pay the half in a lump sum within a number of days. Sounds like a good deal, doesn’t it?
The truth is that whether or not it’s a good deal really depends on how much you owe as well as how much money you have available to you at the time. Chances are if you are in the middle of a debt avalanche, you probably don’t have that kind of money laying around.
Even if you did have the funds, there, of course, is a catch. When you borrow money from a bank or a credit card, for example, you don’t have to pay taxes on that money because it’s not income. However, credit is only considered credit, and NOT income, on the premise that you are going to pay that money back. As soon as a creditor “forgives” a debt either completely or partially, that forgiven debt is now considered income. If money is considered income then you must pay taxes on it. Doesn’t seem very fair, does it?
Here’s an example: let’s say you have a credit Card with a $12,000 balance. You make an offer to settle it for $6,000 and that offer is accepted. You will likely need to pay taxes as if you had received an extra $8,000 worth of income that tax year. The final kicker is that you go through all this and now the credit card company that made the deal with you will likely report your debt as “settled” or something similar which will ding your credit.
Debt settlement is completely different than bankruptcy and if you would like to find out more about the differences please visit our “Bankruptcy vs. Debt Settlement,” article.