Whether it’s due to bad or irrational decisions, youthful naiveté, a bad streak of luck, or situations totally beyond our control, we’re all faced with mounting debt at some point.
If it gets bad enough, some of us may even have to work with our creditors to forgive some of our debt just to remain solvent. But did you know that getting a break on your debt could greatly effect your tax situation? How about the effect accepting a settlement offer has on your credit report?
Michele Singletary over at the Washington Post has written a series of three articles addressing these types of questions. The series was prompted by a reader looking for advice regarding a bad debt.
The first article covers the original question: the reader thought that accepting a settlement offer would negatively impact their credit score. It turns out that could or could not be the case, but the reason had nothing to do with the reduction in the amount they owed. It actually has to do with the account activity date reported on your credit report: the more recent that date, the greater the negative impact on your score.
The second article gives some additional background, including reminding us that forgiven debt must be reported as income to the IRS. That’s right. You are liable for taxes on the amount of debt forgiven.
The final article of the series breaks down how bad debt is collected and who the money actually goes to. As well as defending the actions of the reader and her own advice.
Overall the articles are informative and quite well written. Definitely worth the read if you’re looking to expand your knowledge, whether or not you agree with her advice in this particular case.