Before You Accept a Debt Forgiveness Deal…

A credit card company reaches out to you and suggests an offer to forgive a portion of your debt with them. Instead of owing say, $30,000, they make the offer to pay off $18,000 within six months. You just need to come up with $3,000 per month and you have $12,000 forgiven. Sounds like a great deal, right?

Not so fast! When you agree to this arrangement, be aware that the credit card company is required to send the details to the IRS. And guess what? In most cases, the IRS is going to treat that $12,000 as income for the year it was forgiven. That means you have to pay taxes on an extra $12,000. Even at just a 10% tax bracket, you’re on the hook for $1,200. Most people fall in a higher tax bracket, however.

You may still consider this a bargain and go for the deal. But, there is another problem with this scenario. The forgiven debt goes on your credit rating as a default. This kills your credit rating which means any future financing is going to cost you a lot more.

There are no easy answers when you have a heavy debt burden. If you own your home and have some equity, you may want to consider a home equity consolidation loan. This won’t reduce the balance owed, but it will reduce the amount of interest that gets tacked on each month. Another option is to take a second mortgage. You can get an even lower financing deal when doing this and you can write off some of the interest.

Work with the credit card companies and ask if they will agree to a lower interest rate. As long as you eventually pay off the balance, this should not adversely affect your credit rating.

Be careful concerning companies offering to help you with your debt situation. Contact your state and ask about which programs are legitimate. There are many scams surrounding the debt reduction market and you may end up making your situation worse.

The worst thing you can do is continue paying the high rates of interest. Unless you receive a huge surplus of cash or you get a mega raise at work, it is unlikely you will ever get out of the debt situation without taking the appropriate steps.

James is a writer/author and maintains several blogs, including http://mockupfund.com and http://GetPaidBootCamp.com.