American credit cardholders are being cautioned against trusting card companies offering debt forgiveness so easily. According to industry experts and tax analysts, millions of cardholders may feel as though they have dodged paying full credit debt but in reality, they may have to pay the taxes on the remaining debt.
The increasingly difficult economic situation has forced many card firms to adopt policies of debt forgiveness. While the practice is not new to the credit card industry, the sudden demand for debt forgiveness has caught many card companies off guard. Rising unemployment rates have resulted in growing losses for major card firms. As a result, many card issuers have resorted to negotiations with cardholders owing substantial debt.
In fact, the Nilson Report suggests that card firms are projected to forgive a total of $400 billion in bad credit card debts over the next five years. In comparison, card issuers forgave a total of $250 billion in the last five years. The expected increase, analysts say, is part of the credit industry's efforts to collect any payment from indebted cardholders. Growing losses have forced many companies to accept just about any payment rather than forego them.
Most debt negotiations usually result in the card issuers accepting payments that total only to 50 or 60 percent of the actual credit debt. While most cardholders would rejoice over their apparent success, tax experts say that these consumers may not be out of the woods yet. Cardholders will still have to pay the taxes that come with the remaining amounts. Although the card companies would report the debt as fully paid to the government, they still have the obligation of reporting the remaining amount of the debt to the Internal Revenue Services. When this happens, the cardholders will be left to pay for the taxes.
However, the IRS will easily forego collecting taxes on remaining debts if the card firms declare the debts as "unpayable" and delegate the collection to a debt collecting agency. In these situations, the collection companies are not legally bound to report the forgiven amount to the tax collection agency.
Financial experts suggest consulting first with a tax specialist before entering into any debt negotiations with card issuers. Tax experts would be able to analyze a cardholder's current situation and suggest possible scenarios and solutions before a consumer even contacts his or her card company. Doing so can help cardholders reduce the amount of tax they will have to pay even after their debts are forgiven.