For those seeking credit card debt forgiveness, the laws surrounding this very issue can often be hard to understand and navigate. The majority of people seeking credit card forgiveness will have either considered settling their credit card debt or contacting a creditor and having the debt settled that way. While settling credit card debt will help to relieve strain, potential tax consequences are associated with this process. However, there are a number of circumstances that will aid determining whether or not you have to fulfill a tax obligation following credit card debt forgiveness.
Credit Card Debt Settlement
In order to settle credit card debt, you will need to make contact with a creditor and arrange to pay less than your outstanding credit card balance. The total balance settled upon will be dependent on your own negotiation skills and on the amount that the creditor is able and willing to accept. If your negotiation skills are exemplary, you may be able to settle for around fifty percent of your outstanding credit card balance.
The 1099-C Form
Following credit card debt forgiveness, a creditor will provide you with a 1099-C form. This is, in layman’s terms, a form for the cancellation of debt. This form instructs you to declare the settled credit card debt as income to be taxed during the filing of your taxes. If you are in possession of a $8,000 credit card balance and your creditor is willing to accept a $5,000 settlement offer, it is up to you to report the difference as income when you file your tax forms. In this case, a difference of $3000 would have to be declared.
Declaring Credit Card Debt Exceptions
In some situations, it is not necessary to report settled credit card debt as income to be taxed. If you have been granted relief through declaring yourself bankrupt, you are exempt from the tax rule. Other exceptions to the rule center on the status of both your assets and your liabilities. When an individual’s liabilities exceed their assets, they may not have to report their credit card debt to the IRS as taxable income. However, these laws are often not as uncomplicated as they first seem. For this reason, it is advisable to consult with a tax professional. If this applies to you, you may be advised to file the 1099-C form and the IRS 982 form.
Debt Management Programs
Consumer advocate groups and the banking industry have teamed up to attempt to put together a pilot program to enable credit card companies to provide certain individuals with credit card debt forgiveness. Those enrolled in special debt management programs are allowed to eliminate approximately forty percent of their credit card debt. Those enrolled in the program would typically be given a period of five years in which to repay the remaining money owed. Under proposals of this kind, the credit card companies would not be required to report an individual for bad debt for five years. This means that these credit card companies are able to reduce the losses reported for a given period of time.
Credit Card Debt Forgiveness and Credit Card Companies
When credit card companies exhibit debt forgiveness, they are able to write off the debt and clear their books. This in turn increases the company’s chance of survival. Credit card companies will natural attempt to collect as much as they can on bad debts and exhibiting credit card debt forgiveness is a way in which to do it. According to the credit card industry newsletter, the Nilson Report, it is expected that the banks will write off in excess of $390 billion within the next five years.
The Importance of Your Credit Score
If you are granted credit card debt forgiveness, you are likely to gain a significant amount of relief. However, this does come at a price. It could mean that your credit score ends up becoming reduced. The amount at which it will reduce can stand anywhere between 70 and 130 credit points. This will jeopardize your chances of being granted credit in the near future. Furthermore, when you are granted a loan or other form of credit, this will be at a greater rate of interest and you will be required to meet the cost of several fees too.
You Can Achieve Credit Card Debt Forgiveness
If you are deep in credit card debt, while you may be despairing inside, in reality, it is very possible to achieve credit card debt forgiveness. If you follow this simple guide to credit card debt forgiveness, you can be successful in your quest. The maze will be a little easier to navigate and you will be soon relieved of your debt worries.
