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Using a Professional Financial Debt Solution – What Tax Effects?

You must be aware of tax effects of the solution you select. Yes, depending on the type of financial debt solution you choose based on your situation there may be tax consequences. For instance, there are no tax changes for you if you enter into a debt management program as that is a process that entails you paying back everything you owe, just with a lower interest rate attached to it.

However if you decide a debt settlement program is what you need to get out of debt, then you need to be fully aware of the IRS tax implications. For some odd reason the IRS tax code is written such that it assumes the savings you get when a debt settlement company successfully negotiates down the amount you owe, is taxable income. So yes, the difference between the money you originally owed and the amount you actually pay will be taxed.

It is important to understand this and more importantly, plan for it. A good debt settlement company should discuss this with you upfront so you can set aside the money as part of your monthly payment. That way you will not go from being free of credit card debt into a situation where you are in debt to the IRS (not something you want to do).

There is a chance that given the state of the economy, the Federal Government will alter this law which hurts people trying to fix their financial problems…we can only hope aa we wait and see.