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Taxes could be a factor when using debt settlement
By Oscar Monfort on May 27th, 2010
Rather than fall into bankruptcy, which can reduce a credit score for years, consumers may consider debt settlement in to reduce what they owe.
However, a recent report from Detroit television station WXYZ noted that people who have some of their debt forgiven through settlement will have to pay taxes on the amount. Rick Bloom, president of an asset management company, told the station that companies that credit card companies will report the forgiven debt to the Internal Revenue Service.
"That's disheartening because you're trying to do the right thing, trying to take care of things in the right order, but somehow it all blows up in your face," Bloom said.
The amount consumers will have to pay to the IRS after settling debt depends on which tax bracket they are situated in. Although they will have to pay the government for reducing their debt, doing so may be a more welcomed approach to bankruptcy, which can make it difficult for consumers to gain access to loans in the future because of a reduction in their credit score.
While debt settlement can also lead to a lower credit score, the amount is less than the effect of a filing for bankruptcy.
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