When you have a lot of debts and are having problems repaying them, some people may recommend that you try to settle your debts. This is the process where you offer the financial company a percentage of the total balance outstanding. Often they will accept particularly if they are worried that you cannot afford to repay the total amount.
But this is also an area that is not as straight forward as it sounds. For one thing the IRS may have a problem with you settling credit card debts and could hit you with a tax bill. I know it sounds crazy to incur a tax liability when you are drowning in debt but it can and does happen. The financial institutions must report the accounts that are settled for a difference of over $600. For example, if you owe $1000 and the credit card company accepts $300, they will report this transaction to the IRS as the difference of $700 between the amount due and paid is over the limit. Depending on your personal circumstances, the IRS can treat this $700 or part of it as income you earned in that financial year and tax you accordingly. So you should never enter into this type of transaction without having professional advice.
The IRS aren’t the only people you need to worry about. It is not unusual for the credit card company to conveniently forget that they agreed to close the account in return for the money and to continue to chase you for the balance. This could go on for years. If you decided to settle an account always have the credit card company confirm the terms of the settlement in writing before you part with the cash.
Finally settling a credit card account for less than the outstanding balance can adversely affect your credit score. Hopefully you now realize that there may be better ways of dealing with your debt problems. No one is suggesting that claiming bankruptcy is the answer in all cases but often it is an option that is overlooked yet could be the best answer to a particular situation.