Debt settlement and income taxes - Your questions answered

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College loan consolidation - Tips from the pros
Should I consolidate my college loans or not? 1. Still in school, yes! Rates are low, but they're scheduled to go up. Your college loan payments will then remain as manageable as possible when you leave school. If you have graduated, or will be graduating this May or June, yes! Graduates can lock in historical low rates, and reduce their monthly payments more than half. You can lock in ... Read debt consolidation article



Choosing A Debt Settlement Company
We all want more for less, bargain has been our innate human quality. We regularly get pop ups, mails, recorded messages, and more from several debt reduction companies. Some of us are drawn in like a moth to a flame at the promise of getting anything for 50% reduction of debt or total debt settlement within one year, or so. Some simply skip through them. There is less harm being moved away by the... Read debt consolidation article



Debt settlement and income taxes - Your questions answered
Debt settlement has become a popular approach to resolving problem debts without having to file bankruptcy. With this approach, creditors agree to accept a portion of what you owe (usually around 50% or less) to settle the account, and the remaining balance is forgiven. This technique will certainly continue to grow in popularity now that the new bankruptcy law makes it tougher to fully discharge debts in a Chapter 7 bankruptcy.

As with anything, there is no free lunch, and creditors are required to report canceled debts to the IRS on Form 1099 (when the canceled balance is $600 or greater). Therefore, the possibility exists that you may owe taxes on the forgiven portion of the debt. For this reason, many financial writers and debt counselors are strongly critical of debt settlement, to the point where they actually recommend against it just because you might end up owing taxes. But the tax consequences of settling your debts are greatly over-emphasized, and this is a really just a minor issue at best.

First, even if you end up owing taxes on the canceled balances, that's because you saved a bunch of money off your original debts. The total of what you paid the creditor, plus the taxes, will still be much less than what you owed to begin with. There is still a net savings. So it's hard to understand why this is viewed as a problem in the first place!

Second, the great majority of people who settle their debts are not required to pay taxes on the forgiven part of the balance. That's because of the "insolvency" rule, described in IRS Publication 908, "Bankruptcy Tax Guide." Don't let the title fool you. You don't need to have filed a formal declaration of bankruptcy to take advantage of the insolvency rule.

Basically, "insolvent" means that you have a negative net worth -- that is, you "owe" more than you "own." As a consequence, most debtors do not have a tax liability on the canceled debts, simply because most debtors are insolvent! It usually comes down to home equity. If you have enough equity in a home (or other property) to outweigh the total of your liabilities (debts), then you have a positive net worth, and will likely have to pay taxes on the forgiven debt amounts. However, the majority of people in serious debt trouble have a negative net worth, and are therefore insolvent. The way it works is that you can offset the canceled debt up to the amount by which you were insolvent at the time you did the settlement.

Come tax time, be sure to get professional tax advice specific to your situation. Also, be sure to read the section in IRS Publication 908 on "reduction of tax attributes," which requires people using the insolvency rule to reduce their basis in such things as rental property, loss carryovers, etc. Most of that probably won't apply to you, but again, get specific advice before winging it.

So, the message is, relax about paying taxes on canceled debt balances. That should be the least of your concerns if you're upside down financially. Don't let the misguided criticisms of financial writers (who haven't done their homework) discourage you from looking into one of the most popular and flexible options for achieving debt-freedom.

Charles J. Phelan has been helping people become debt-free without bankruptcy since 1997. A former executive in the debt settlement industry, he teaches the do-it-yourself method of debt negotiation. Audio-CD material plus expert personal coaching helps consumers achieve professional results at a fraction of the cost. http://www.zipdebt.com

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Debt free in easy steps

So, you want to be debt free do ya?

Well of course you do!

So what's the simplest, biggest positive impact "tip" you can take?

Easy: Stop overspending.

I know, I know... society, our "get it now, pay later" culture, advertisers and the allure of "instant gratification" have a strangle hold on you, but hey! The truth is: if you never cure the root cause of the problem, then the problem will never go away!

So what's the root cause of all your debt problems? Spending too much.

How can we cure this problem? The answer is simple. Not exactly "easy", but very simple: Control your spending. How do we do that? First, we must TRACK our spending.

Research has shown that people who do not track their spending on average spend 10% MORE than they make. Sound familiar?

So how do people who over spend get by each month? Enter credit card debt... have any? If so, I would venture to say that you may not be tracking your spending either. Is this the case? If so, take the first step to becoming debt free and take control of your spending.

The best way to get control of your spending is to find a simple way to begin tracking your spending. You must set up a spending plan (budget). It takes choice, action and some self discipline, but hey, so does ALL financial success.

What's in it for you? Well, by tracking your spending you'll recover the 10% of your income that you're currently over spending and STOP the "need" for you to go further into debt. Just think:

If you make $3,000.00 a month in income, that's THREE THOUSAND LITTLE CHOICES you have every single month. That's a lot to account for, but by DOING IT; you will gain insight into your spending habits. Simply by becoming aware, you will start making better choices.

I personally recommend the Mvelopes Personal Budgeting System - http://startovertoday.mvelopes.com . Try it free for 30 days. If you actually DO it, you will find the tool saving you a lot more than the $7.95/mo it costs to continue.

This is the one thing I challenge all of the people I consult with to do, whether they are asking me for help with debt consolidation, debt settlement, credit counseling, and bankruptcy or even investing, the reality remains the same: we must learn to control our spending. Tracking our spending is the first step to becoming debt free.

Jesse Niesen is the COO of STARTOVERTODAY.COM, a Nationwide Financial Solutions Company solving financial, debt and credit problems for clients nationwide. Jesse has led STARTOVERTODAY.COM in helping thousands of people resolve over $20,000,000 of unsecured debt since the summer of 2002. http://www.startovertoday.com


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Debt settlement and income taxes - Your questions answered
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