In case you are contemplating taking up debt settlement for making an end of your financial worries then the chances are that you will be having a lot of questions and doubts in your head about a lot of things that are allied with the debt settlement process. In this article, we will try to highlight as well as answer some of these queries for you.
- What are your tax consequences for debt settlement?
Financial institutions will have to report the canceled debts which are over six hundred dollars to IRS, while the debtor will have to report that as an income on his tax returns. But the IRS will permit you to offset any wage amount from your canceled debts up to an amount for which you can be considered insolvent at the time when your debts were all canceled.
You will become insolvent in case owe more money than what you own, and that means that in case you have a negative net worth. If you are quite deep in debts, then it is unlikely that you will have a positive net worth and hence it is rare that clients will have to pay taxes on this forgiven debt amount. There can be an exception when an individual who has high home equity level that can make his total gross worth completely positive and as a result eliminate his insolvency exclusion. But this is only an exception and not a rule. It can be a likely circumstance that you owe taxes on your forgiven debt balance and you will still stay quite ahead by eliminating the debt balances you have in quick time.
- Can your wages get garnished?
If you can listen to a few debt collectors, then you may get fooled into thinking that they may seize your next salary unless you give them a payment right at that point in time. The threat that one may lose a part of his wages to such a garnishment action is quite frightening to people who are already having financial problems. But this will be mainly an intimidation tactic which is used by collectors in order to scare people into committing to payment schedules even if they do not have the appropriate funds with them at the moment. Garnishment actions, in reality, are quite rare and will not be happening without any prior warning. First, the creditor will have to bring about a lawsuit and then obtain some kind of judgment and then take the extra step to get authorization for this garnishment. Also, at a single time, only a single creditor can garnish your wages. No one will be able to take out your salary without getting court approval, and you will also be getting a notice about such court actions through formal documentation.
- How does debt settlement differ from credit counseling?
Perhaps the most significant difference between the two approaches is that in credit counseling, you will pay all of your debt balances along with interests and other fees while in debt settlement, you will only pay a part of your debt loads. That is the reason why debt settlement is a quicker way for reaching financial freedom in around 2 and three years rather than with credit counseling which can take from 5 to 10 years. This will mean that you will be paying quite less than what you have paid if you had not used debt settlement approach.
Also, a significant difference is the fact that with debt settlement the firm will work only for you who is their consumer and will receive no compensation directly from any of the creditors. Thus, basically, your debt settlement firm will be on your side completely. In a credit counseling agency, a part of the income they make will be from their client, and a part will come from the kickbacks paid to them by the creditors.
- What type of debts can get negotiated by debt settlements?
As a central rule, all types of unsecured debts can get successfully negotiated. Unsecured debts are those that are not tied to any material possession that can get repossessed by your creditor. For instance, an auto loan cannot get included as the creditor will be able to take away your vehicle and repossess it legally. Medical bills, credit card debts, departmental store bills, signature loans and unsecured credit lines are some of the different types of loans which can be settled by debt settlement. The central exception in debt settlement is the student loans which are in general, certain government-backed loans which cannot get discharged in bankruptcy proceedings. Private student loans which are not government sponsored can get included.
- What if your creditor does not want to negotiate?
Debt settlement companies have substantial contacts established with a lot of major banks, collection agencies and debt collection attorneys. Debt settlement has been recognized as a feasible solution for debt collection by the industry professionals. In some rare instances where certain creditors refuse to accept a good settlement when it gets proposed, it generally means that you will have to just for some more time before he gives in. There are some creditors who are inclined a bit to play harder than the rest however almost all the main institutions will ultimately sell the accounts to the debt collection agencies to recover their money. Also because of the fact that the collection agencies are going to get commissions for the accounts they acquire, hence they will be quite inclined to accept some reasonable settlement offers which will still be profitable for them.
To go through debt settlement ratings of various debt settlement firms, before finally settling for a firm to do your work.
Wrapping things up
Debt settlement is a viable option for settling your financial life in order. Hopefully, this article would have helped you acquire some knowledge about the debt settlement procedure.