Working out the best solution to erase huge amount of credit card debt

There are many people out there are who are searching everyday for debt solutions to come out of their excessive debts. If you are thinking that you are the only person going through this traumatic situation, you are certainly mistaken. There are a lot others in this country who are up to their eye balls in debt. Credit card companies make maximum amount of money by luring you into using their credit card. They will often offer you many attractive offers to tempt you. They want you to use your credit card excessively so that you reach to that point where you find it hard to make monthly payments and hence, you end up paying high amount of interests and fees on top of the principal amount to these credit card companies. There are many credit card companies who will mail you an application form. You just have to fill it, get approved for the credit card and dig yourself further into the hole. If you are not making a proper use of your credit cards, you will find yourself drowning deep in huge amount of debt. Here are a few steps to follow and you can begin the process of unburying yourself.

Pick the credit card on which you are having the least amount of money and work on paying off that balance first. Try paying more than the minimum balance so that maximum portion goes towards the principal amount and less is eaten up in interests and fees. This will also help you to pay off the credit card balance faster and then close that account. Cut off the credit card into four pieces and throw it away. Then you should move on towards paying off the credit card with the next lowest balance. While you are following this process, make sure that you are paying at least the minimum amount on the other cards so that the other credit card companies are not charging you their highest interests and fees. Repeat this process until you reach to the last card which needs to be paid off. You will realize that you are able to pay a decent amount of money monthly since that’s the only card left to be paid off.

The second step is to pay your credit card bills on time. Credit card companies earn maximum amount of money by charging excessive late fees. If you are gone late by just one day, you will be charged very high late fees. You can save yourself from such additional charges. Choose a credit card with the lowest interest rate and do not use it unless you absolutely have to. Otherwise you will find yourself in the same spot where you started from.

If you are having a hard time in managing your finances, and you have already got yourself into deep amount of debts, you should immediately consult a debt specialist. There are some reputed credit counseling or debt settlement companies who will help you in dealing with your creditors and work out a suitable repayment plan with your creditors.

Taxation of forgiven debt

Many people go through serious financial problems at some stage of their life and hence start missing their payments on credit card bills. The account may be sent to some collection agency after the account has gone delinquent for quite some time and hence they will be willing to settle for less than half of the total balance. Once the account is paid off, the debtors often think that the matter is closed, but it is not like that. The creditor will issue a 1099-C. It is actually a notice to the IRS about the forgiven debt. The debtor has to pay taxes on the amount forgiven as it is shown as an income. And if he does not it during the time of his filing taxes, then heavy penalties and fines will get imposed.

Sometimes, your home may also get foreclosed by the mortgage lender if the property is sold for less than the amount of the loan. In this case, the borrower not only loses his home but also have to pay huge tax bills. This bill will come after many months after the tax was filed as a result of an IRS document matching program. This “under-reporter” notice brings grief to the taxpayer.

The only way by which the debtor can escape from this situation if he is not filing taxes on the forgiven debt is to prove insolvency. There are certain circumstances by which he can qualify in an “Insolvency exclusion”. You are considered to be insolvent when your liabilities exceed the fair market value of your assets. In that situation, the forgiven debt will not be considered taxable or only a portion of it is counted as income.

You may not have any taxable income from the 1099-C, but you must show it on your return. You have to prove whether you were insolvent at that time when the debt was canceled. You owe taxes on the amount forgiven. For example, if the forgiven debt is $10,000 and your financial situation is worth $5000, you would only have to pay taxes on the amount left. Home foreclosures is quite complicated and you may have other legal arguments besides insolvency.