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Understanding the Implications of Credit Card Debt Reduction
Credit card debt has become a financial epidemic in the US. A large number of people are shelling out more than what they can afford to and getting drowned in the sea of debt. Consequently credit card debt settlement is soaring. With credit card debt settlement, a large part of the outstanding balance is forgiven.
The amount that can be settled is determined by your financial situation and how well you negotiate with the lenders. It is possible reduce debt by 50% through this process. It is true that debt settlement can indeed pull you out of debt but there are some tricky things involved as well. Read on to know more.
Debt settlement might have tax consequences depending on your situation
This form will ask you to enter the details of the settlement process and to report the amount pardoned as taxable income when you submit your taxes. Suppose you have credit card debt amounting to $10,000 and the lender agrees to forgive $4000. In this case, you have to show $4000 as taxable income in the tax form.
There are exceptions to the above rule and sometimes you do not need to report the forgiven amount even if you save money through a debt reduction process. For instance, this rule is not applicable when you file for bankruptcy. Secondly, your assets and liabilities are also a factor here. If your liabilities are more than your assets then you can very well skip the tax rule. It might be a smart idea to take the help of a tax attorney to complete the 1099-C form rather than trying it yourself. He can advice you to fill up IRS form 982 (in case you are eligible for it) as well as 1099-C. This is an intricate issue and you would certainly need expert advice.
Effect on your Credit score
A new proposition
Consider the above things carefully and then decide if it’s right for you to settle your debt.
This article was written by Oak View Law Group.