Many consumers are not aware that credit card debt forgiveness exists. Unfortunately, many consumers became victims of debt in the current economic crisis. Consumers could not afford their monthly expenses, including outstanding credit card balances. In many instances, consumers used their credit cards to pay for necessities that were once being covered by their monthly salary. When the monthly bill became more than they could handle, consumers sought solutions to alleviate their debt. Debt may be settled, but the amount is taxable by the government. Taxes may leave creditors in an even greater financial strain.
Debt Settlement
Under the Obama Credit Card Debt Forgiveness Act, consumers may negotiate to reduce the total amount owed by as much as 50% or more in some instances. Since the law was enacted, consumers must simply contact their creditors. The credit card corporation will give consumers information regarding the debt forgiveness program. Most companies require that you have more than $10,000 or more in outstanding credit card balances to take advantage of the law. With a credit reduction, consumers may eliminate their debt in two to five years.
Sample credit card debt forgiveness letters are found online to serve as a guideline for those who desire to negotiate with their creditors. Most consumers find these letters effective. However, some people choose to hire an attorney or a debt settlement agency to assist with the matter.
Debt Settlement Agencies
Debt settlement agencies are available to help speed up the process of credit card debt forgiveness. Some of the agencies are reputable and others may charge exorbitant fees. Research each company to find the best rate for the services offered. Most legitimate debt settlement agencies will offer a free consultation with no obligation to accept the service.
Consumers who decide to accept the service should expect the company to negotiate a reduction on the outstanding loan amount. The service should also provide a plan to repay the remaining amount owed on the outstanding loan based upon the reduction. Some agencies may also help consumers rebuild their credit and improve the credit rating after the amount is paid off.
Keep in mind that credit card forgiveness can decrease a consumer’s credit score by 70 to 130 points. This will significantly decrease the consumer’s ability to get loans or credit in the future. Any loans obtained will result in higher interest rates.
After Credit Card Debt Forgiveness
Once the debt is settled, creditors will send a 1099-C cancellation of debt form. This form requires consumers to report settled debt as taxable income when taxes are filed. For instance, if the consumer has a credit card debt of $10,000 and the creditor accepts a settlement of $4,000, then the consumer must report $6,000 or the difference as income on IRS tax forms.
There are some exceptions to the rule. Some consumers may not have to report settled debt as taxable income. For instance, consumers are excluded from this rule if they were granted relief through bankruptcy. Additionally, if the amount of liabilities exceed the total amount of assets, then the credit card debt is not considered taxable income. Accountants and tax professionals will provide expert guidance regarding tax laws involving credit card debt forgiveness.
The 1099-C form is typically mailed by creditors several months after the debt forgiveness occurs. Creditors are required by law to report the settlement to the Internal Revenue Service if the debt collectors agree to accept $600 or more less than the original balance due. Taxpayers that do not report this as income on their taxes may be subject to fines, penalties and IRS Audits. The income forgiven must be reported as other income on Line 21 of the 1040 tax form.
Most consumers are not aware of this tax law and furthermore are not aware of a 1099-C tax form. Since the letters are coming from the creditors, this form may be overlooked by most recipients. Most people will not become aware of this unless they are audited by the IRS.
Between 2003 and 2008, the number of 1099-C debt cancellation forms filed with the federal government doubled, according to the IRS. In 2003, the IRS received just under 1 million 1099-C forms. However, in 2008, that number reached 1.987 million. The number continued to increase in 2009. Experts speculate the increase was attributed to credit card debt and mortgage foreclosures.
Banks and Credit Card Debt
Banks are constantly seeking bailouts from the government to increase likelihood of their survival. The banking industry devised a plan that would give them the ability to forgive credit card debt for certain consumers. Those consumers who would enroll in their credit card debt forgiveness program would be allowed to wipe out 40 percent of their debt. The remaining debt could be paid back in five years.
The credit card companies benefited from this proposal because they would not have to report bad debt for five years. When companies write off credit card debt, this helps them improve their chances of survival as a company. According to Nilson Report, banks are expected to write off or forgive over $390 billion dollars over the next five years.
