When too much debt takes over many people seek debt relief through bankruptcy, debt negotiation or debt settlement options. The concern that people have with debt settlement or debt negotiation is whether or not they will have to pay taxes on the amount of the debt that they did not have to pay back.

According to the Internal Revenue Service any debt that is cancelled that resulted in a savings of $600 or more must be reported on a 1099. This would mean that the amount of the debt that was negotiated off could be a taxable event and have you owing money to the IRS. If you happen to be in this situation, there are two reasons why this won’t affect you that much.

Determine What Taxes You May Owe After Debt Settlement

If you can show that you are financially insolvent, you will not be required to declare cancelled or settled debts as income. This is according to IRS Publication 908. You must owe more in debt than you have in assets at the time of the debt negotiation settlement with your creditor. This would also mean that you would only pay tax based on the amount of solvency you have. For example, if you save $20,000 when you only have $6000, you would only pay taxes on $6000.
The reality is that most people have more debt than they have in savings when they enter a debt negotiation program anyway. I would recommend that you speak with a tax professional first to know where you would stand prior to entering the debt settlement program. This way you would not have any surprises regarding the exception on having taxable income.

You May Save Money By Paying Taxes On Debt Settlement

What if you have a taxable event and are issued a 1099 from your creditor? You still saved a lot of money. The IRS will only tax you on the additional income and you will have to only pay a percentage of what you have saved and not the entire amount. If you save $10,000 in the debt negotiation process and are taxed $2000 you still saved $8000. No matter how you slice it, you still come out ok.

Credit card companies are hurting your credit score with the new rules that are coming out.  Across the board credit card companies are cutting credit lines, lowering credit spending limits and closing credit card accounts.  Well this may seem benign to some it is actually hurting your credit score.  When your credit card is closed, all of your credit history goes with it.  Continue Reading »

I just got a letter from Washington Mutual also known as Wamu yesterday.  They lowered my home equity line to $900.  It originally started off at $27,500.  It was lowered about 6 months ago to just over $8000.  What are you going to do with a $900 home equity line?  I told them to just close it.  They said that you have to pay $55 to close it.  Rather than close the line they leave a ridiculous amount on it.  They are too cheap to close the thing themselves.  They would rather have me pay it. Continue Reading »

What should I do if I cannot pay all of my bills.  According to Dave Ramsey you need to prioritize.  The necessities need to come first.  Food, Transportation and housing should be your top priorities.  If you can’t pay your credit cards you may just need to let them go for now.  You will find that your mortgage company will be alot easier to work with than your credit card company.  Mortgage companies are taking extraordinary measures to work with you.  In fact Fannie Mae has stopped eviction and foreclosure proceedings until Continue Reading »

Your credit card company may have lowered your available credit, but why?  If you have been watching the news lately, most of the major headlines revolve around the credit crunch and foreclosures.  Banks and lenders do not want to leave themselves exposed to unecessary losses.  A few months ago Washingotn Mutual lowered my home equity line over 75%.  I had never even used the thing.  The banks are worried that when times get tough, people are going to tap into their equity lines and then default.  The bank just wants to hedge their bet and cover their losses by removing excess credit from people.  This is done in the form of closing credit cards, cancelling home equity lines and lower available credit for credit cards. Continue Reading »

Getting a letter from the IRS can be a scary proposition.  But you do not need to loose your cool.  Just take a deep breath and read it again.  Sometimes your brain can trick you.  You think that you are reading one thing and the letter may actually mean something else.  Most letters from the Internal Revenue Service are just over minor issues.

Recently I got a letter in the mail from the IRS stating that they wanted $21,000 in back taxes.  I thought I was going to loose my mind.  When I got to the heart of the matter I found out that my IRA rollover was not reported correctly.  I thought that is going to take forever to get straight with the tax man.  All it took was a phone call to explain the problem.  The woman I spoke with at the IRS just said not to worry about it and she would send out a letter to fix it.  That was it.  You do not need to fear the IRS they want to get it right and they do not really want to give you a hard time either.

It just goes to show you that 99% of what you worry about never happens.

The economy has hit the skids.  Millions of American are facing job cuts and layoffs.  When will the financial services mortgages sectors of the economy begin to pick up steam again? Continue Reading »

Loan modification is the process of renegotiating mortgage terms to an affordable level.  Millions of Americans are facing foreclosure.  The good news is that the banks are willing to renegotiate the terms of these mortgage notes rather than take on additional REO inventory.  The cost to carry foreclosure property for banks runs into the hundreds of millions.  The banks still have to pay the property taxes, hoa fees, landscaping and maintenance fees.  It is cheaper for them to modify your loan and keep you in the property rather than foreclose and take the property back.

What Is The First Step To Modifying A Mortgage

Your first call should be to the loss mitigation department of the bank that holds your mortgage.  Explain the circumstances to the bank representative.  They may ask for your most recent tax returns, pay stubs and asset account statements.  You need to demonstrate an ability to be able to make the new payment should they grant you a loan modification.  If you are lucky you will get a reduced interest rate as well as a write down on the mortgage balance.  You may also get a no interest option for a while.  Often you can get a forbearance agreement which will lower your payment and tack on the difference to the mortgage balance.

If You Are In Trouble With Your Mortgage, Do Not Wait Til Its Too Late

If you are in trouble and put your head in the sand, you may just be doing yourself in.  If you know you are in trouble don’t wait.  Get help now.

When will the economy start to improve?  This is anyones guess.  But a few things need to happen before consumer confidence will turn around.  The subprime meltdown has caused a mental picture of wealth to scarcity to occur.  When people felt their homes were worth a lot of money and they had equity, they would be more eager to spend.  Now the statistics for equity in home for homeowners is frightening.  More than 1 out of 6 homeowners are upside down in their mortgages.  This means that they owe more than their home is worth.  When this occurs, people are going to hang on to their cash.  That home equity line is closed or has been reduced by the bank.  Many people used their home equity lines for cars, home improvements or vacations.  When the equity is gone there is going to be a pullback in spending.  When their is a pull back in spending, companies are not making as much as they were in the past.  Thus you have people that are losing their jobs.  These people are no longer discretionary income and are just happy to get by every month.

What Will Fix The Economy?

How will the economy get fixed?  Hard to say, the first thing is that we need to get consumer confidence back and job stability.  When people feel secure about their jobs, they will buy.  They will buy cars, they will buy houses and they will take vacations.  John McCain wants to focus on bailing out homeowners, but I think we need to focus on stabilizing the job market and consumer confidence first.  The 300 Billion could be better used to stimulate jobs.  Once we have this under control, people will go out and make a home purchase.  I do think that the banks will need to step in and modify some of their terms.  There is nothing wrong with doing short term forbearance agreements with people until things turn around again.  We survived the real estate crash in the 80′s, we will get through this one.

Can you go to jail if you do not pay your credit card bill?  No, If you stop paying your credit cards, your life will become a lot more difficult.  The first thing that will happen is that your credit score will drop like a rock.  A few late payments can drop your fico score as much as 200 points.  Your credit card company is going to raise your interest rates and start tacking on late fees.

When Will Creditors Starting Calling Me If I Get Behind On My Bills? Continue Reading »

People in this country are in debt.  I get asked questions all the time about negotiating credit card debt.  Now I am getting questions about negotiating on a car loan.  For starters you can negotiate with credit card companies once your are behind on the bill.  Credit card debt is unsecured debt.  Car loans are different.  A car loan is secured by the asset, the car.  If you quit paying on your car loan, the repo man will come and get it.  My suspicions are that they are getting more car repossessions now more than ever. Continue Reading »