I have a large amount of credit card and loan (unsecured) debt (138,000)but I can still manage to make my payments on time and sometimes a little more than the monthly payments. However, there is an exception, I can't make payments to American Express. I don't want to file bankruptcy and I don't want tax ramifications that will probably occur by other means of helping lower my debt. I am helping to support my daughter and her family (husband and 3 children). On my income, which is approximately 70,000 after taxes its very difficult to say the least. I also understand that in all probability I won't get far trying to negotiate with American Express on my own. Any suggestions?
First, I want to assure you that you are not alone in this predicament; many consumers find themselves buried in debt before they even know what happened. Thankfully, I can think of several possible solutions to your problem. The fact that you have already begun researching possible solutions is a good sign that you are committed to resolving this financial predicament. If you follow the links below, I can put you in contact with a company that may be able to assist you in resolving these debts.
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One option to consider is a Consumer Credit Counseling Service, or CCCS. CCCS companies offer numerous services, such as financial counseling and budget planning, as well as Debt Management Plans (DMPs). In a DMP, the CCCS would arrange a new payment amount with each of your creditors, usually based on a reduced interest rate. You would then make a single monthly payment to the CCCS which would distribute the funds to your creditors, based on the new payment amounts. There are several drawbacks to CCCS, though. First, depending on your creditors, it may not be able to reduce your monthly payments enough to improve your financial situation. Second, it may have a negative impact on your ability to obtain a loan, so you may not wish to enter into a DMP if you anticipate any large purchases, such as home or an auto, in the near future. Third, the average DMP takes around five years to pay off your debts, so you must be willing and able to commit to a long-term repayment plan.
You may also want to consider the services offered by debt settlement firms. Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing your debts by 50% to 60% of your principal balances. These programs usually take only 2-3 years to complete, so this is a good option for many people to rid themselves of debt in a relatively speedy manner. In many cases they can also reduce your monthly payment toward your debt. There is one major drawback to debt settlement programs, though–they will significantly damage your credit while in the program and for at least a year or two afterwards. A debt settlement program is probably the fastest way to resolve you debts, and once you repay your debts, you should be able to rebuild your credit score through careful management of your credit accounts.
I should mention that the two options I discuss above are designed to assist consumers with all of their unsecured debts; they are not designed to address a single debt, such as the American Express account in your case. However, since you are contemplating bankruptcy, the programs described are possible alternatives that you may wish to consider. If you are intent on resolving only your American Express account and maintaining the status quo with your other creditors, I would encourage you to contact American Express to discuss your financial situation and ask what options the lender can offer you to relieve the hardship that this account is causing you. If you have been making timely payments on the account, the creditor may not be willing to negotiate with you at this time; if you have been able to make your payments on time, then the creditor may think that you will be able to continue making them. However, if you have missed payments in the recent past, or if the account is currently delinquent, you may find the creditor more willing to negotiate. For example, I have found that creditors are more willing to negotiate lump sum settlements with consumers when accounts at least three to six months delinquent. When a consumer has missed several payments in a row, the statistical likelihood that a debtor will be able to pay off the account goes down significantly; this often leads creditors to accept 50% or less of the balance owed rather than risk not being paid at all. If you would like to read more about negotiating with your creditors, I encourage you to visit the Bills.com debt negotiation page.
If you do negotiate a settlement with American Express or any other creditor, the creditor is required to report the portion of the debt which it forgives to the IRS, which would treat the forgiven debt as income for tax purposes. Therefore, settling on a large debt could significantly increase your taxable income for the year in which the account is settled. However, if you can show the IRS that you were insolvent (that is, your liabilities outweighed your assets) at the time that the debt was forgiven, you may be able to exclude the debt forgiveness from your taxable income. While I do not know all of the details of your financial situation, based on the information in your question, it sounds like you may fit the definition of insolvency for tax purposes. If you are insolvent, you may be able to settle your debts without incurring any additional tax liability. I would strongly encourage you to consult with a CPA or licensed financial planner to review your finances and to help you determine if you qualify as insolvent for tax purposes. Once you make that determination, you can make a more informed decision about how best to proceed in resolving your financial difficulties.
Hopefully, one of the several options I have described above may be able to help you. I cannot tell you which option is best for you, since I do not know enough about the details of your financial situation to make a fully informed recommendation. However, I encourage you to explore the Bills.com website (http://www.bills.com/debthelp/), to read more about these and other options available to you. I hope that the information I have provided helps you resolve your debts and helps you Find. Learn. Save.