IRS may come calling after debt settlement

By Marvin Milner on Jun 29th, 2010

Debt settlement may be an option consumers choose when facing credit card bills they can't handle.

However, doing so can have a number of negative effects. Personal finance expert Liz Pulliam Weston noted that it can lead to a drop in a person's credit score, which is a number used by companies when deciding whether to grant a consumer a loan.

"Settling a debt can have another consequence: The forgiven debt may be reported as income to the (Internal Revenue Service), increasing your tax bill," Pulliam Weston wrote.

There are other issues regarding debt settlement, including complaints from consumer advocates about the fees charged by these companies. Not only do the fees make it harder to get out of debt, they can also lead to consumers being swindled by unscrupulous companies that don't provide the promised services.

As a result, people who are already in trouble with their bills could find themselves in an even worse financial predicament. However, some states in the country are considering additional regulations for the debt settlement industry. For example, Illinois may set limits regarding fees charged by these firms.

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