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Milwaukee, WI Bankruptcy Law Blog

Thursday, April 12, 2018

The Downside Of Debt Settlement

If you watch television or listen to the radio, there is a good chance that you have recently seen or heard an ad for debt consolidation and relief. They are on all the time. And like most ads, they don’t tell the whole story. Debt consolidation and forgiveness have tax consequences that can make bankruptcy a better option.

Ads for debt consolidation imply that it is a great option for anyone who is struggling to pay off their debt. They make the process sound easy, fast, and cheap. What they don’t reveal is that the government treats forgiven debt like it is income, and taxes it as such.

Say you contract with a debt consolidation company, and they manage to get your creditors to forgive a total of $10,000 in exchange for a promise that you are going to be on a repayment plan with one, low monthly payment that you can easily handle. Even if you are in the very lowest tax bracket, you will owe the IRS $1,000 extra dollars come April 15. A lot of people are not going to be able to come up with this money, or you might see your tax refund eaten up by it, depriving you of that money.

The government does this in order to capture some of the tax dollars it loses when your debts are forgiven. Basically, they think they are losing out on taxes your creditor would have paid on the money that was forgiven, so you should have to make some of it up to them.

The only way to have debt forgiven without being taxed on it is to go through the bankruptcy process. Debts that are consolidated or forgiven in a bankruptcy are not taxable.

There are obviously downsides to bankruptcy as well. It ruins your credit and depending on what type of bankruptcy you file you might have to give up some assets you would rather keep.

Our firm does both debt consolidation and bankruptcies, so we can help you figure out what options are available to you, and give you the information you need to make an informed choice about what path you should take. Everyone’s situation is different, so don’t rely on an ad to determine whether debt consolidation or bankruptcy is the right option for you. If you are considering filing for bankruptcy, contact Mont Martin today.


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© Mont L. Martin, Attorney at Law | Disclaimer
933 North Mayfair Road, Suite 107, Milwaukee, WI 53226
| Phone: 414-436-8428