How honest efforts to repay debt can backfire.

Each year, I meet several clients who have struggled so hard to repay their insurmountable debt, they have actually put themselves in a worse position than if they had done nothing, or filed bankruptcy sooner.

Taking out a Home Equity Loan to pay off unsecured debts.

Unsecured debts are mostly all dischargeable in bankruptcy.   These are things like credit card bills or medical bills.  Secured loans, however, like second mortgages and home equity loans, stay on your title until repaid, even after bankruptcy.  Although bankruptcy releases  your personal obligation to repay them both, if you want to keep the house, you’ll have to repay the loan anyway because the lien continues.  Why trade a dischargeable debt for one you will have to repay for years and years to keep your house?  If you are considering taking out a second mortgage or home equity loan to pay off credit card bills, talk to us first.  We can usually find you a better option.

Cashing in a retirement account.

IRA’s, 401(k)’s, SEP’s, and most qualified retirement accounts are almost all fully protected in bankruptcy.  Creditors can’t attach them and you can’t be forced to give them up even in bankruptcy.  However, many people struggling with burdensome debt feel compelled to get out from under and often cash in retirement plans to repay debt that can be discharged in bankruptcy. And, unscrupulous debt collectors often persuade people to cash them in with high-pressure tactics. Don’t make this mistake.  Talk to us first!  Save your pension funds for your retirement.

Settling a credit card debt yourself.

At some point, you may receive an offer to settle your credit card debt for half of what you owe.  It’s tempting to make such a deal, especially if the offer comes at a time when you have the cash available, like right after April 15th and your tax refund is still in the bank.  Before you jump at such an opportunity, consider this.  The credit card company will report the amount waived as “debt forgiveness” and you will get an IRS form 1099 for the amount of the cancelled debt.  You will then owe income taxes on that amount as if you had received it as income.  For example, say you owe $10,000 on a credit card and they accept $5,000 in full settlement.  Six months later, you get a 1099-C in the mail saying you received $5,000 in income.  You must report that amount as income on your federal 1040 and Mass Form 1.  If you are in an ordinary middle-class tax bracket, this result in you owing $850 more in federal taxes and $312 in state taxes.  A very unpleasant $1,000 surprise.  And I’ll bet the credit card company does not warn you of this consequence.

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