Ouch! The worst inflation in more than 40 years is inflicting pain on virtually every American, effecting their families, their budgets and their decisions.
The U.S. Department of Agriculture says inflation at the grocery store is 10.4% from June 2021 to June 2022. 41% of shoppers are now buying store brands rather than name brands. 63% are buying them because of value and 55% are buying them because of price. Gas prices are up 60% during that same period. And it’s not just fuel for your vehicle. A headline from Bloomberg says “Electric Bills Double for U.S. Families with Fuel Costs Surging.”
Because of higher costs for everything, almost 64% of Americans are living paycheck-to-paycheck compared to 55% one year ago. More than 33 million Americans spent more than they earned in the past 6 months. And it’s not just low-income Americans being affected. 48% of people making more than $100,000 a year are living paycheck-to-paycheck. More than 70% of U.S. adults say they’d be in a difficult situation if their paycheck was delayed by a week. And for many there’s no cushion. A majority of Americans have less than $1,000 in savings
As prices rise and purchasing power goes down more people are using credit cards to buy everyday essentials. 23% of Americans say that paying for basic necessities such as rent, utilities and food contributes the most to their credit card debt. According to the Federal Reserve Bank of New York’s quarterly report on household debt and credit:
- There was a record 537 million credit card accounts in the first quarter of 2022, a jump of 31 million from first quarter 2021.
- There was a 29% increase in revolving debt in March 2022 alone.
- Americans loaded an extra $46 billion on their credit cards during the second quarter of 2022.
- Credit card balances had the largest increase in more than 20 years growing 5.5% in the second quarter of 2022 and 13% year-to-date.
- 43% of Americans expect to add to their debt load in the next six months, especially young adults and parents with young children.
- The number of delinquencies in credit cards, car loans and mortgages has increased significantly.
As the mountain of consumer debt swells, it will begin to crush large numbers of American families because their income won’t be enough to pay the bills and make the payments on their credit cards. Many will turn to consumer debt settlement companies which, for a fee, will manage the settlement process on the consumer’s behalf.
In tough economic times, consumers increasingly turn to debt settlement companies. From 2007-2010, during and after the Great Recession, the number of people using debt settlement companies increased by 50%.
A debt settlement is an agreement in which a creditor agrees to accept less than a consumer owes and then wipes out the debt. For example, a consumer may owe $50,000 on a credit card and the creditor agrees to accept $10,000. The debt is gone and so is the payment. It sounds like a great solution. But there are two consequences to debt settlement most people don’t find out about until it’s too late.
Even if you settle a debt with a creditor for less than the full amount, or a creditor writes off the entire debt, you still owe money—to the IRS. The IRS treats the forgiven debt as income and you have to pay taxes on the amount that was written off. In the example above, that means you’d have to claim $40,000 as income in the year the settlement was completed.
Any financial institution that forgives or writes off $600 or more of a debt’s principal, which is the amount not attributable to interest or fees, must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for reporting income, which means when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure you report the amount on the Form 1099-C as income.
Even if you don’t get a Form 1099-C from a creditor, the creditor might very well have submitted one to the IRS. If you haven’t listed the income on your tax return and the creditor has provided the information to the IRS, expect a tax bill, or worse, an audit notice, either of which will add interest and penalties to the amount you owe for the forgiven debt.
The second consequence of debt settlement is the hit on your credit score. Even though debt settlement allows you to end on good terms with the creditor, your credit record will show that you only paid a portion of the debt and that you were delinquent on your payments. When the creditor reports that information to the credit reporting agencies your credit score goes down—a lot.
Settled accounts stay on your credit report for seven years, so anytime you try to open another credit card or apply for any type of credit, the lender will see your low credit score and the debt settlement information. It usually takes between 6 and 24 months before a credit score begins to improve.
There is certainly a place for debt settlement agreements. But don’t be blindsided by what comes next.