You do your best to look for methods you can you can try to get ahead of this—but how do you get ahead of an avalanche?
You call the hospital or the credit card company to ask about Debt Settlement. The representative on the other line says they are willing to forgive half of your total balance if you pay the other half in a lump sum within a number of days. Sounds like a good deal, doesn’t it?
The truth is that whether or not it’s a good deal really depends two main things. The first is how much you owe in total; and the second is how much money you have available to you at the time. Chances are if you are in the middle of a debt avalanche, you probably don’t have that kind of money laying around.
Even if you do have the funds to pay a lump sum, there is a catch. There’s always a catch. Often times, you will end up having to pay taxes on whatever amount is forgiven by the creditor.
The explanation for it is this: when you borrow money from a bank or a credit card, for example, you don’t have to pay taxes on that money because it’s not income. It’s money you are borrowing and intend to pay back later with your own money. However, “credit” is only considered credit, and NOT income, on the condition you pay that money back. Consequently, as soon as a creditor “forgives” a debt, either completely or partially, that forgiven debt is now considered income. If money is considered income then you must pay taxes on it.