Ive discussed this time and time again with clients, but here is another reason I believe debt settlement in New York does not work as an effective method to erase debt: Taxes! You heard me, Uncle Sam. You see if you had a credit card debt of $10,000 and you filed for Bankruptcy in New York City, you wouldn’t be responsible for a penny of that debt tax wise. Thats because, by law, that debt is forgiven. But lets say you were to settle that debt with a debt settlement company or even on your own. Lets take the $10,000 example. If you settle the $10,000 debt for a paltry sum of $5,000, with, lets say American Express, you feel like a champ. You just saved 5k AND you didn’t have to file Bankruptcy in New York. Problem is, you likely didn’t save 5k. You see that 5k that you saved is treated as ordinary income for tax purposes. What that means is that the creditor will very likely hit you (like my legal-ese?) with a 1099 and you’ll have a nice tax debt to pay, which, mind you, is not dischargeable in a Bankruptcy if its less than 3 years old. So the lesson here, if any of you are still awake following my tax talk, is that before you think that debt settlement might be a better option that a simple Bankruptcy filing in New York, think again about the financial pros and cons of both.
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