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Forgiven debt can lead to more financial troubles

Pennsylvania consumers who are facing overwhelming debt may look for relief from various sources, including debt settlement companies. These are organizations that help a consumer reach deals with creditors and debt collection companies. While settlement can offer relief in some ways, it can actually lead to additional financial troubles in the form of tax obligations.

Debt settlement companies work with creditors to negotiate a reasonable payment amount that will allow the consumer to resume payments. They may also be able to reach an agreement regarding a lump-sum settlement amount. This may be possible for individuals dealing with delinquent car payments, credit card bills and student loans.

Settlement or loan forgiveness provides immediate financial relief. It can also result in serious tax consequences down the road, especially if the cancelled debt was significant. This is true for any cancelled debt amounting to $600 or more. The IRS considers this taxable income, and it can lead to higher amounts owed in taxes. Higher taxes can be devastating for those who are already struggling with maintaining financial stability and making monthly payments.

There are times when debt settlement may make sense for a Pennsylvania consumer. However, this is not always the best choice for those who may benefit more from bankruptcy protection. For those dealing with significant amounts of unsecured debt, Chapter 7 provides a way to deal with these balances that does not result in tax penalties. An assessment of the individual situation can help an individual understand the most appropriate way to deal with specific financial troubles and concerns.

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