- Debt forgiveness received from bankruptcy is not taxable. If you settle a debt for less than what you owe, the creditor must send you an IRS 1099 form if the amount forgiven is greater than $600. If you pay $2000 to settle a $4000 debt, you might have taxable income of $2000. Debts that are forgiven in bankruptcy are never taxable.
- Chapter 13 Bankruptcy lets you deal with all of your creditors in one proceeding. A confirmed Chapter 13 repayment plan is binding on all of your creditors, even creditors such as the IRS or your care lender. Debt settlement companies, however, typically only work with unsecured creditors such as creditor card companies and they won’t assist you with tax debts. Some creditors like American Express will only work with the borrower and not a debt settlement company. The automatic stay created by the filing of a bankruptcy prohibits any of your creditors from suing you.
- Chapter 13 bankruptcy gives you more control than debt settlement. In Chapter 13, you submit a payment proposal to the court based on your ability to pay. If you can convince the Chapter 13 trustee and the judge that your plan complies with the law and is proposed in good faith, you don't have to worry about negotiating with multiple creditors.
- You can modify some car loans in Chapter 13. If you purchase a car and the original loan is more than 910 days old, a Chapter 13 bankruptcy could help you force the lender to modify the loan. A number of my clients have used Chapter 13 to reduce the balance of their care loan and reduce the interest to as little as 4.25%.
- Some debtors can use Chapter 13 to get rid of a second mortgage. If a debtor's home is worth less than the balance owed on a first mortgage, a homeowner that qualifies for Chapter 13 can get a court order stripping the second mortgage from their home. I recently helped a couple remove a $116,000 second mortgage from their home. Debt settlement cannot promise that.
If you are in financial difficulty and are in Southern California, a free a consultation is just a phone call away. Please call me today at (619) 448-2129 to explore you options for a fresh start with bankruptcy.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar, the San Diego County Bar Association and the National Association of Consumer Bankruptcy Attorneys. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.