Considering Debt Settlement over Bankruptcy in New York City? Watch out for the Tax Problems they don’t tell you about.
If you are deep in debt with an increasingly desperate financial situation you are probably weighing the pros and cons of bankruptcy and debt settlement. Most consumers in New York City don’t realize that settling debts outside of the bankruptcy process has significant tax consequences that debt settlement firms don’t tell you about. Eliminating debts through bankruptcy will put an end to your debts for good, but using a debt settlement scheme to get out of debt invariably leaves consumers with a number of financial headaches including lingering tax liabilities.
First thing you should know if you are considering settling your debt with a debt settlement program instead of eliminating it through bankruptcy is that the IRS considers any forgiven debt as income that can be taxed accordingly. If the debt settlement program is successful in reducing your credit card bill from $25,000 to $10,000 the $15,000 that was forgiven will be taxed by the IRS. You will be taxed on money you don’t actually have and didn’t actually receive. Discharged debts in bankruptcy on the other hand cannot be taxed by the IRS. The debt and any taxes that would have come along with it are wiped away forever. You could have $1,000,000 or more discharged in bankruptcy with no increases in your taxes.
Another important consideration that debt settlement companies don’t like to talk about is that the IRS will rarely agree to settle any tax debts. If you owe the IRS, debt settlement won’t help. At best they will set up an installment plan for you, but they will rarely have any effect on reducing the principle tax debt owed to the IRS. Debt settlement firms may advertise to settle tax debts for pennies on the dollar, but in reality the IRS will rarely agree to an “Offer in Compromise.” The IRS is almost never willing to write off tax debt but in bankruptcy they are often forced to.
No one should rush into bankruptcy, but if you live in New York City and are hoping to avoid bankruptcy through any number of debt settlement schemes realize there are hidden tax consequences that will be avoided if you file for bankruptcy. Settling credit card debt only to find yourself in more trouble with the taxman won’t be doing your finances any good. Get some free advice from a qualified bankruptcy attorney before signing up with any debt settlement program. If you live in New York City contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free consultation today. We only practice bankruptcy law and maintain a 99% Chapter 7 bankruptcy discharge record in New York City as of 10/7/2015.
**** DISCLAIMER: This article is intended for educational purposes only. By reading no attorney-client relationship has been created. Prior results do not guarantee a similar result for future clients. Attorney Advertising. We are a Debt Relief Agency.