You can't pay your credit card bill. There you said it.
What to do?
Well, you should call the credit card company to try to make alternate payment arrangements. Instead, you decide to let it ride a few months to wait for that sudden upturn in business you're hoping for. It never comes, and then the collection letters start coming. And then one, that looks awfully appealing, arrives. It says:
"You owe us $20,000, but we will settle for 40 percent of that balance. And you can pay us that $12,000 in easy installments. Call today!"
That sounds interesting. You can get back on track with repaying your debt. And put $8,000 in your pocket.
Before you pick up that phone and commit with the representative on the other end, there's something you should know. That debt relief probably won't be as large as you or other Ohio residents anticipate.
See, Uncle Sam likely will consider that seemingly $8,000 windfall to be income, not a gift. Come the end of the year, the company with which you negotiated the debt probably will send you a tax form – a 1099-C – that shows its supposed generosity.
In fact, the total of debt cancellation forms, as they are called, sent to taxpayers for the 2017 tax year was expected to be about 4 million, according to the Internal Revenue Service (IRS). The agency expects about 4.3 million household will receive such forms in 2018 and projects it to skyrocket to 6.3 million in 2025.
Many consumers don't know what 1099-C forms are or to look for them in their mail. So, they don't get filed with federal tax returns. Few consumers know that settling the debt for less than they owe can cause tax issues.
There are some instances in which consumers won't owe taxes on a debt settlement, but the rules are complex and not something that they should try to figure out on their own. If you are considering settling a debt by paying less than you owe, you need to know the consequences first. The first call you make should be to an attorney who works with bankruptcy, debt relief or debt consolidation issues.