How Bad Debt Management Can Really Hurt You.

January 5th, 2010 | by admin |

How Bad Debt Management Can Really Hurt You.

Posted on | January 5, 2010 |

Many people realize too late that they have a problem managing their money. This epiphany usually comes when a 5 figure credit card bill is staring them in the face. It happened to me, and it can happen to you. I was lucky in that mine was a low 5 figure amount, and I had the income to pay it off myself with some belt tightening and 0% balance transfer offers from another credit card company.

But not everyone is so fortunate.

Many people have no where else to turn but to a debt management agency. The main problem with doing so is that they end up going to a debt settlement agency instead.

What’s the difference between debt settlement and debt management?

Ah, a fine question – and as it turns out, a very important one to ask.

A debt management company will begin making payments directly to your creditors immediately upon hiring them, while working with you to develop a budget to affordably pay back the entire amount you owe.

A good debt settlement company will work with your creditors to forgive a certain amount of your outstanding debt and work with you to pay off the remainder over time through regular payments you can afford.

A bad debt settlement company will charge you excessive fees, while placing your income and assets at legal risk and leave you owing almost as much in the end as you did in the beginning. Here’s how…

They tell you not to contact your creditors, while taking your payments.

This is a sneaky way to get their up front fee. They tell you to make 6 months of payments before they start sending money to your creditors. This is the same thing as you not paying your creditors for 6 months. This will irritate the creditors, most likely to the point where they will pursue legal action against you. Depending on the state you live in, the creditor could begin garnishing your wages.

This could lead to you still owing your creditors AND being out the money you sent to the debt settlement agency.

A good debt settlement company will work with an attorney and notify your creditors to send all communication through him.

You will probably owe uncle same a chunk of change also.

Assuming your creditors don’t sue you and garnish your wages, and that the debt settlement company does what they say they will, you could still end up owing a sizable amount to the IRS.

Once some amount of the debt has been forgiven, and the rest has been paid off you should get a Form 1099 from your creditors reporting to the IRS the amount forgiven on your debts as income.

You read right – as income.

The IRS considers any forgiven debt to be income for you, and depending on the amount forgiven and your tax bracket, that could be a lot.

For example, if you owe $45,000 and manage to settle the debt with a $25,000 forgiven and you’re in the 25% income tax bracket then you would owe an additional $6,250 in federal taxes – not counting any state income tax!

The lesson is clear – carefully read any agreement and be sure you understand it fully before signing!

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