Debt and the IRS

You have seen the ads.  Most of them start something like “Do you owe the IRS?” or “Are you trapped in debt?”  There are two or three people who report that they did, indeed, owe tens of thousands of dollars and that – almost miraculously – the debt was forgiven.  It sounds like a dream come true, an offer that’s too good to be true. 

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That’s because it is.  You may be tempted to call the 800 number and, for a fee, put your financial future in the hands of a company that promises to solve all your debt problems.

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Before you reach for your phone, there are a few things that you should know.

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When you contact a debt settlement company, the first thing they will do – after they ask enough questions to determine how big a financial hole you are standing in – is get a retainer.  It’s generally $1,000, although it could be more.  They advise you to sit back, relax, and let them do their work.

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What they do is . . . nothing.  They do not contact your creditors immediately, and they do not make any of your payments.  Instead, they let the debt pile up even more so that, eventually, your creditor is willing to make a deal that forgives much of the interest.  In some cases, the creditor may forgive some of the original debt.

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The debt settlement company doesn’t tell you two important things:  first, your credit score will go down.  A lower credit score will mean that, when you make a big purchase such as a car, the interest rate you will be charged will be higher.  A lower credit score and a higher interest rate will mean higher payments.

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Second, you will get a 1099 form for debt and interest amounts that were forgiven.  The IRS will treat that total as income, and you will have to pay tax on it. Depending on your financial situation, the total on the 1099 could move you up to a higher tax bracket, meaning that you will pay even more in taxes.

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You do have options.

 

Contact Brzustowicz and Marotta, the attorneys who provide the legal help you need.  With more than 55 years of combined experience, we have the perspective to show you a better set of options than just digging a bigger financial hole.