For some people, filing a bankruptcy is simply not an option, whether it is due to personal beliefs or something else. What then is someone to do to clear away their unwanted debt? The answer for some is to consider what I term a “workout”.
As the name may imply, a workout is where one attempts to settle their debt at a (hopefully) far lesser amount than what is otherwise owed to the creditor. This can be done on one’s own or with the aid of legal counsel. This is done outside of any type of court proceeding and in most instances can be completed in only a few months. There are, however, a few things one must be aware of prior to beginning this process.
First off, a creditor is not going to significantly reduce one’s balance amount to then agree on accepting monthly payments towards the reduced balance amount. Rather, any agreed upon reduced balance amount will need to be paid in full, normally within fifteen (15) days or so of the settlement date. This means that one must have a “pool” of money to draw from in order to successfully “workout” the debt in question. Put another way, you’ll need to be able to pay before you begin to play with the creditor. In most instances, a debt will be able to be settled for between 40-60% of the actual debt amount.
Secondly, assuming one is able to resolve their debt with the creditor in this manner, there is the possibility that the creditor will issue a 1099-C for the amount of forgiven portion of the debt. Any debt forgiveness in excess of $600.00 will afford the forgiver of the debt (the creditor) the ability to issue a 1099-C. The 1099-C will indicate the amount of the debt that is being forgiven. In the eyes of the federal government, the forgiven debt amount is the equivalent of income that someone has received but has failed to pay any taxes towards. As such, the greater the amount of the debt forgiven, the larger one’s tax exposure will be. For many, this may not be an issue, but for others this could cause a significant tax obligation in the near future. It is important one is aware of this potential tax exposure prior to commencing a workout.
Like most things in life, workouts are not for everyone. However, for those who can obtain a pool of money, a workout can be a cheaper and quicker alternative to filing bankruptcy. Moreover, resolving a debt through a workout does not impact one’s credit score to the degree that a bankruptcy filing will. It is important to explore all suitable options when you begin experience financial money problems.