Rejecting bankruptcy could trigger a tax aftershock

| Aug 1, 2018 | Debt Relief |

Being overloaded with debt is a horrible condition. Few people can appreciate the pressure it puts on individuals and families in Connecticut. Even the process of finding solutions can be hard. Many avoid it altogether because of shame at being in the situation at all. Embarrassment or lack of information leads some individuals to pursue methods of debt resolution that achieve desired results, but leave them open to an unexpected financial aftershock.

Don’t dismiss bankruptcy

The major goal of any debt relief solution is the elimination of debt. But the route to achieving that goal has negative consequences if you choose a path without examining and understanding all the options.

Many choices exist. Among the most common are these.

  • Paying monthly balances: This typically requires paying more than the minimum amount owed on an existing balance. If practiced with diligence and discipline, you can reduce debt, avoid late fees and interest charges, and protect your credit score. But it can take a long time.
  • Debt consolidation loans: One common for this is home refinancing based on equity in the property. The extra money can be used to pay off bills and you face just one monthly payment. The key is to be sure you can afford that new payment.
  • Debt settlement: This involves engaging with a debt relief agency that negotiates with creditors to lower balances due. If all works according to plan, a certain portion of the debt is forgiven, but this process tends to involve litigation which can take time and negatively affect your credit report for a time.
  • Debt management: This is like debt settlement. The key difference is that the service provider includes counseling that helps you identify the spending habits that got you into trouble in the first place and an outline of best practices to prevent problems in the future.
  • Bankruptcy: This is probably the most often dismissed but undervalued of options. There are different filing forms available. The one to choose depends on the specifics of your situation. Protection of significant assets is possible in many cases.

Potential benefits of bankruptcy

Through bankruptcy, debt relief occurs under the protection of the courts. Creditors are blocked from conducting collections. Plans for debt payment, including amounts, are presented. Once approved, protections continue as long as the terms of the plan are fulfilled.

But biggest potential benefit that bankruptcy holds for approved filers may in the context of taxes. Other options might include provisions for forgiving debt, but debt forgiven in bankruptcy is not taxable. Loan balances forgiven under other relief options might be, creating that unexpected financial aftershock we mentioned at the start of this item – a hefty tax bill.

To be sure you know your rights and your relief choices, consulting a skilled bankruptcy attorney is recommended.

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