Debt settlement is when a debt reduction is negotiated with the lender of a borrower. Generally, lenders agree to forgive up to half of a borrower’s debt: usually around 50%, although outcomes can vary widely. Once settlements are reached, the terms will be officially set in stone. The downside to this is that if you ever default on your obligation, you face serious consequences.
If your creditor agrees to debt settlement, he or she will inform the IRS about the agreement. According to the law, the IRS holds the right to seize properties owned by an individual that owe taxes to the government. Essentially, you will owe the IRS a portion of what you actually owe. The creditor may also ask for penalties for late payments, along with interest and fees.
Some debt settlement scams will propose an agreement where the total amount owed does not appear on your income statement. In other words, you don’t owe that amount; it’s a clerical error. However, creditors are required to report every year the total amount of debt that a person owes, including any collections. So, if you never owed that amount and were late with some payments, you probably won’t owe anything total at all to the IRS.
Another ploy debt settlement companies use is to offer to settle for less than you actually owe. To do so, they must convince you that the amount you pay to them will be lower than you would owe otherwise. If you owe property tax, for example, you could pay the debt settlement company twenty dollars in one lump sum and get written notice saying you owe X dollars more. This type of over-the-top debt settlement should be avoided because it doesn’t eliminate the debt; it just converts it into a line of credit.
Debt settlement has some risks associated with it. First, you will have to pay taxes on the forgiven debt, but you won’t pay taxes on the initial face value of the debt settlement. This is because the forgiven debt isn’t taxable until several years after it is settled. This can result in a substantial tax hit to you over time. You’ll need to discuss this with a certified public accountant or tax advisor.
Mesa debt relief company cannot charge upfront fees before the settlement is done. You’re only charged a fee when the debt is paid in full. Also, you shouldn’t allow the debt settlement company to collect any money for their services until you’ve settled your debts. You should insist that this provision be included in the contract you agree to with the debt-settlement company.