Why Working with Debt Settlement Companies Doesn't Work

What those debt settlement firms typically don't tell you (or make clear anyway) is that when the debt is "settled", the amount of the debt that is "forgiven" becomes TAXABLE INCOME to you for which you will have to pay taxes on. This potentially will cause more financial problems for you in the future. For example, if you settle a $10,000 debt for $2,000, a tax form is issued by the creditor to the IRS (and you) stating that $8,000 of the debt was "forgiven". That $8,000 will be considered taxable income to you on your next tax returns (both federal AND state). It's as if you "earned" $8,000 without having any taxes withheld, and you will have to pay taxes on that "income"! 

When you file a bankruptcy case, the debt that is "forgiven" ("discharged" is the technical term) is NOT taxable income to you. This is just one more reason why you should consult a professional when considering your options when you have debt problems. A bankruptcy case may be the "financial management tool" you've been looking for.