Do it yourself debt settlement is a very rewarding but tedious process and can end up saving you thousands of dollars. Using iSettledit.com’s free resources,tips and tools will significantly you through the ups and downs of debt settlement. Below are a few steps you will need before making the phone call to your creditor.

Here are some of the risks of not paying your creditors whether it’s for debt settlement, bankruptcy, etc.:

(This is for educational purposes only and does not constitute tax or legal advice. For information about your individual situation, please consult with a licensed tax or legal professional.)

Wage Garnishment

The most common type of garnishment, is the process of deducting money from an employee’s monetary compensation (including salary) as a result of a court order. Such payments are limited by federal law to 25 percent of the disposable income that the employee earns. Wage garnishments continue until the entire debt is paid or arrangements are made to pay off the debt.

At present four U.S. states — North Carolina, Pennsylvania, South Carolina and Texas — do not allow wage garnishment at all except for debts related to taxes, child support, federally guaranteed student loans, and court-ordered fines or restitution for a crime the debtor committed. Several other states observe maximum thresholds that are lower than the 25 percent maximum provided by federal law. States may also prohibit garnishment altogether in certain circumstances. For example, in Florida the wages of a person who provides more than half the support for a child or other dependent are exempt from garnishment altogether. Loans and negotiations with creditors can also help debtors to avoid wage garnishment.

Right of Offset

The right of offset means that a bank has the legal right to seize deposited funds to cover a loan that is in default. For example, if you have a credit card with Chase and you are delinquent, Chase has the right to go into your checking account and seize any funds to help pay your debt. If you have a credit card with Wells Fargo and a checking account with Bank of America the funds cannot be seized because their is no association between the bank and creditor.

Judgement

A judgment lien is a court ordered lien that is placed against the home or property when the homeowner simply fails to pay a debt. When the homeowner has a judgment lien against his or her home and wants to sell it, the judgment lien has to be paid in full before the home or property can be sold. This process is started by the creditor issuing you with a summons (order to appear in court). A judge will hear the creditors argument and either grant or deny the judgement. Again, if communication is ongoing with the creditor this is less likely to happen.

Risks when you reach a settlement

1099-C

In the event that you settled a debt for less than the balance owed, the creditor is allowed to report the amount of the balance they compromised as a loss on their income statement. Since you never paid the full debt back, the IRS treats the amount you did not pay as income. For example, let’s assume you settled a $10,000 debt for $4,000. The IRS expects you to report the difference, or $6,000, on your income tax return for the year in which the settlement occurred, even though you never actually received the money.

What if I haven’t received a 1099-C form?

For settled debts less than $600, you will not be liable to report the forgiven portion on your taxes. Otherwise creditors are responsible for sending you a 1099-C by the 31st of January before that year’s taxes are due. Creditors must send a 1099-C to the IRS by February of that tax year.

What should I do if I receive a 1099-C for a settled debt?

You need to report the forgiven portion of the balance as income on your tax returns. The amount shown in box 2 of the 1099-C is the portion you are expected to report as income. It is possible, however, that you are not liable to actually pay taxes on the settled debt.

When are taxpayers not liable to pay taxes on forgiven debts?

There are five situations when a taxpayer is not responsible for paying taxes on the forgiven balance:

1. When the credit card debt was discharged through filing bankruptcy.
2. When the debtor was technically insolvent at the time of settlement. (insolvent: when their debts exceed their assets)
3. When the debt was due to a qualified farm expense.
4. When the debt was due to certain real property business losses.
5. When the discharge of the debt was treated as a gift.

To learn whether you qualify for these circumstance, you may want to consult a licensed tax professional.

I was insolvent at the time of my debt settlement. What should I do?

If you were insolvent at the time of settlement, you will need to either fill out IRS form 982 or attaching a letter to your tax return that details your total debts and assets.

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