Tax Ramifications of Settling Credit Card Debt in New York City
Consumers in New York City faced with overwhelming credit card debt have a number of relief options available including debt settlement and bankruptcy. Considering the unfair stigma associated with bankruptcy many people will rush towards a debt settlement program without understanding the lasting negative consequences. Debt settlement programs are not a magic wand. There are significant tax ramifications and other problems that most struggling people fail to recognize before signing up. If you are behind on your bills and struggling to keep up with you debts you should consult a bankruptcy attorney before committing to a debt settlement program.
Debt settlement is an inherently risky process, and lacks the full power of law that bankruptcy provides. If you are successful in reaching a debt settlement agreement with your credit card company, which is no guarantee, you will still have a problem with the IRS. Any debt that is forgiven by the credit card company will be considered taxable income by the IRS and New York State. The difference between the original amount of your credit card debt and the amount you settled for is fair game for the tax authorities. Credit card companies will report settlement amounts to the IRS who will in turn consider this amount as income that can be taxed accordingly. Having a remaining tax liability often defeats the purpose of settling credit card debts in the first place. Having legal authority, bankruptcy on the other hand is guaranteed to eliminate credit card debt and will not leave you with any hidden tax problems.
A debt settlement company will often advise someone to stop paying their credit card bill and to pay them the money instead. They will take a substantial monthly fee from this amount and will put the rest of your monthly payment towards a lump sum that will be hopefully be used to settle your debt at a later date. There are a lot of scams in this regard, and despite our persistent warnings many clients will turn to debt settlement that should really be considering bankruptcy. A credit card company has no obligation to honor a debt settlement agreement and are as likely to sue you for the whole amount owed plus interest as they are to settle with you through a third party. Bankruptcy’s “automatic stay” forces your creditors to immediately cease any and all creditor actions against you. If you qualify for bankruptcy relief (which is likely if you are looking into debt settlement already) you will receive relief from your credit card debt forever. There will be no guessing game and you will not be left with any lingering tax obligations.
Bankruptcy has pros and cons, but if you need relief from your credit card debt discussing your bankruptcy options should really be the next step. If you live in New York City contact the Law Offices of William Waldner online or at 212.244.2882 to arrange a free bankruptcy consultation today. We know what to expect before filing your case. We only practice bankruptcy law and maintain a 99% Chapter 7 bankruptcy discharge record in New York City as of 8/31/16.
**** 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.