The Long-Term Impacts of Debt Settlement

Going through the process of debt settlement is something that many people have to deal with at some point. When you settle your debt, you can quickly eliminate it. However, there are some consequences that you should consider carefully before you settle. Here are some of the long-term impacts of debt settlement.

Credit Score

The biggest impact that settlement will cause is to negatively affect your credit score. Your credit score is one of the most important numbers that you have. When you go through the debt settlement process, it will be reduced. The process of debt settlement involves you agreeing to pay the creditor a lump sum amount, in order to close out the account. The amount that you pay them will be less than what you actually owe, in most cases. Therefore, you are not actually living up to your end of the agreement that was originally set forth. When you racked up the debt, the creditor believed that you would eventually repay it.

Since you are not repaying all of it, they will reflect that negatively on your credit report. In the status of the accounts, it will say something about it being "settled" instead of "completed" or "paid." As a result, the credit bureaus will lower your score significantly.

Inability to Purchase

With a lower credit score, it will become very difficult to purchase any goods or services in the future. Finding credit accounts that are available to you can be hard under these circumstances. Lenders can easily pull up your credit report and see that you settled your debts. They know that you took on more debt than you could handle and then eventually settled. Most of the time, lenders will not be willing to work with you as a result of this. They will not want to give you an amount of money when they feel that there is a chance that you will try to settle again in the future.

Tax Implications

Another area that debt settlement could affect you is in the area of taxes. Many people never stop to consider the tax implications that a debt settlement could have. When you settle a debt for less than you owe, the amount of debt that was canceled is considered income. According to the IRS, you have to count the amount in your income taxes for the year.

The creditor that you worked with for the settlement will report the amount to the IRS and they will send you a 1099-C tax form. This will have the amount of the canceled debt on it and you will have to add it on to the amount of money that you made for the year.

If you settled your debts early in the year, it could potentially be several months down the road before this is an issue. Therefore, a large tax debt could blindside you. You will essentially be paying taxes on money that you did not physically receive and your tax liability will can be increased.

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