Understanding Insolvency and Student Loan Debt
Managing Other Debt Settlements to Get Into The Black!
Nov 9, 2009
Few people, if any, would choose to be so poor as to be able to discharge student loan debt in a bankruptcy. Most people would prefer to be solvent and pay their expenses as they go. Unfortunately, many forces in the economy interact with the needs of individuals often thrusting the unsecured debt levels higher than is desirable.
Cancellation of Debt
When debt levels get so high that it becomes difficult to make the regular monthly payments, people sometimes look to make settlements with their creditors. The amounts of debt forgiven in these settlements can result in taxable income, as the taxpayer had the benefit of the money. However, most people seeking these types of settlements are already insolvent or they would not be seeking to settle these debts.
As explained in recent article, settling unsecured debt does not necessarily result in taxable income. All student loan debt is unsecured debt.
If a taxpayer reviews its outstanding debt, orders it by priority and determines which unsecured debts are the best options for settlement agreement, the taxpayer may come up with a master plan that enables it to systematically reduce its monthly outgo, possibly improve its credit rating, and just plain "get into the black."
The Season for Settlement Offers is Approaching
Collection activities in the winter months tend to offer the best unsecured debt settlements. That is, the settlements offered during the winter months tend to reduce the amount of debt the most. Taxpayers wishing to take advantage of these offers should plan ahead.
An taxpayer insolvent the day before and again the day after a settlement will generally not have to pay income taxes on the amount of reduced debt. Taxpayers who are not insolvent the day after need to ensure their withholding or estimated tax payments cover the additional taxes that may be due because of the cancellation of debt.
Taxpayers holding secured debt, which they wish to have abated, should review their plans with their tax professionals. Timing can make a big difference on how quick an individual gets back into the black.
Timing is an Element of Managing Credit Card Debt
In an ideal world, everyone would pay their credit cards on time, in full, every month. Through wise use of debt settlement options and timing them so as to legally minimize any additional income taxes due, taxpayers can reduce their debt, then pay off their student loans debt, and be able to once again pay all their bills on time.
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