Frequently Asked Questions About Debt and Debt Reduction Programs
2. How do I find a good company to work with?
There are a few things you can do to ensure you are working with a solid debt solution company. You can check them out with the Better Business Bureau (BBB) and you can check them out with ChoiceREVU. However, the absolute best thing you can do is educate yourself about your options. Once you have a good understanding about how each debt option works, you will be in a much better position to screen companies and advisors. Visit our "How Debt Solutions Work" page to learn about your available options.
4. How will a debt program affect my credit?
The most important thing for you to understand is that the only way to preserve your credit is to pay your required payments on time every month, or pay your debts off in full. Anything else you do including consumer credit counseling, debt settlement/debt reduction, or bankruptcy, will negatively affect your credit. You have to make the decision about enrolling into a debt program based on your situation. If you are maxed out on your credit cards and can barely make your minimum payments, you do not have good credit; even if you have never made a late payment. You may be in a position where you cannot move forward financially until you have dealt with your debt. If that is the case, then you may need to focus on getting out of debt and worry about your credit later. If you are already falling behind on your payments, then your credit is aready adversely affected.
8. What is unsecured debt vs. secured debt?
Unsecured debt is any type of account that you did not put up any collateral behind, meaning no tangible assets or personal property is attached. These types of debts include credit cards, department store cards, medical bills, unsecured personal loans, repossessed vehicles, etc. Some examples of secured debts are mortgages and vehicle loans. In a secured debt, the lender has the ability to repossess the tangible property against the debt.
9. If I do debt settlement, will I incur any additional taxes?
Any creditor that forgives or writes off $600 or more of a debt's principal (the amount not attributable to interest or fees) might send you and the IRS a Form 1099-C at the end of the tax year. These forms are for the report of income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.
There are a few exceptions stated in the Internal Revenue Code. For example, if the financial institution issues a Form 1099-C, you do not have to report the income on your tax return if the cancellation or write off of the debt is intended as a gift, or you were insolvent before the creditor agreed to settle or write off the debt.
Insolvency means that your debts exceed the value of your assets. To figure out whether or not you were insolvent, you will have to total up your assets and your debts, including the debt that was settled or written off.
If you conclude that your debts exceed the value of your assets, include IRS Form 982 with your tax return. For more information or to download the form from the IRS's web site go to http://www.irs.gov.
Please also refer to IRS Publication 908 (7/1996), Bankruptcy Tax Guide.