Q. If I owe on a credit card and they are willing to settle the debt for less money, what looks best on a credit report? If they say the debt has been paid in full or if they say the debt has been settled for a lesser amount?
A. We are not sure that a credit card would indicate that a debt has been paid in full if it has not been paid in full.
Credit report aside, know that if you settle a debt for less than the full amount, the amount of debt that is forgiven is treated as income to them for tax purposes, Ilissa Churgin Hook, bankruptcy attorney and member of Hook & Fatovich told Wayne.
The creditor you settle with will issue a Form 1099, and this will be reported to the IRS, she said.
“It would be prudent for a consumer to check with a tax professional to determine their potential tax liability before agreeing to a settlement amount,” Hook said. “The consumer may have enough deductions that the tax impact of the settlement is negligible; however, it would be wise to have this information first.
Then, she says, depending on the amount of debt and the number of credit cards involved, you might want to ask yourself if a bankruptcy filing is a viable option, Hook said.
“Notably, there is no debt forgiveness income under a bankruptcy court discharge order,” she said.
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Karin Price Mueller writes the Bamboos column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Register for NJMoneyHelp.comit is weekly e-newsletter.