Thinking about using a debt consolidation service or dealing directly with your creditors to reduce or settle your debt?
You may want to think again.
If you work out a deal to reduce or settle your debts, you may fall victim to a little known IRS provision known as “Forgiveness of Indebtedness Income”. The IRS says that if you reduce or eliminate any debt you lawfully owe, you are required to report the amount you saved, as INCOME on your next tax return-that’s right-INCOME!
By way of example, if you settle your credit card debt of $30,000.00 for $10,000.00, the IRS requires you to report the $20,000.00 you saved as INCOME on your tax return. So, if you are in the 25% tax bracket, you would have to pay the IRS a tax of $5,000.00 on the $20,000.00 you saved on your credit card debt. The IRS wants its money with your tax return, and if you can’t pay it, you will incur additional penalties and interest until it’s paid in full.
Even worse, what you have also unwittingly done is taken debt which would have been fully dischargeable in a properly filed Bankruptcy case, and converted it into income tax debt which you CAN’T get rid of. Debt which is discharged/eliminated in a Bankruptcy is NOT subject to the harsh IRS debt forgiveness rules-no taxes!
Hence, before you decide to settle your debt, speak with our office. We can review your personal situation, FREE OF CHARGE, and can properly advise you on the best course of action for YOU.