Credit Repair: No Longer the Solution to Bad Credit

CREDIT REPAIR: No longer the solution to bad credit.

Credit repair agencies have been successful in the past by disputing delinquent credit accounts, and working through the technicalities to remove accounts off one's credit. The most popular technique was dealing with the legal response time a creditor has to respond to a dispute.

Now creditors have a full proof tool, and they are being encouraged by the IRS to use it..... a 1099c form. This is a form the creditors file with the IRS, also forwarding the debtor a copy. This form reports your outstanding debt to the IRS as income, of which you as the debtor will be taxed on.

What many may not have understood about credit repair is even though the delinquent tradeline may have been removed from your credit report, it never erased the debt, the debt is still outstanding and owed. And regardless as to whether the delinquent account is visible on your credit report or not, the creditor can submit a 1099c, reporting the outstanding debt as income. So you see credit repair, as done in the past no longer serves any purpose.

Creditors because they now have a little more leverage on their side are responding to disputes and inquiries in a more timely manner. And in all honesty, what good is it to have delinquent accounts removed off your credit report and be delinquent with the IRS, ultimately resulting in a tax lien, which has a far worst impact on your credit report and rating than a delinquent tradeline.

So what's the solution? The only viable solution is debt consolidation. Many chose credit repair over debt consolidation in the past, because credit repair was relatively an inexpensive quick fix. Where as with debt consolidation one would be responsible for agreeing to a payment plan to pay off the debt usually at a negotiated discount to their original debt amount.

Now there's really only one option that make sense when wanting to insure your credit is restored and most importantly that you steer clear of the IRS. However, even with debt consolidation, depending on the negotiation willingness of the creditors, you may still be required to pay taxes on a smaller portion of your debt.

Here's why: Let's say you owe a creditor $5,000 and they agree to settle for $3,000, well the difference of $2,000 could still be considered income and reported via a 1099c form to the IRS. The brighter side is instead of you paying taxes on $5,000, you'll be paying taxes on only $2,000.

Now if you're thinking, "well I would rather just go ahead and pay taxes on the whole $5,000 than to negotiate with the creditor to pay them back $3,000, and still may have to pay taxes on $2,000, because the total out of pocket would be $750 (if in the 15% tax bracket), instead of a total of $3,500".

You're absolutely correct, but fact is just because you paid the taxes on the outstanding debt amount as income, still doesn't relieve you from the debt. And once you pay the taxes on a debt, you are admitting to the debt, exhausting any recourse to have the delinquent account removed from your credit report, regardless of how awesome your credit repair agent may claim to be.

OK, and then there are those of you who are thinking, "well at that point, I will just file bankruptcy". Well here's something to consider, with the new bankruptcy guidelines in place, what is the likelihood of you convincing a bankruptcy court to do anything other than, (keep mind your debt on your tax returns which will be required by the bankruptcy court is now considered income), allow the filing of a Chapter 13, which is going to put you on a payment plan according to their guidelines, not yours, with no interfering negotiation for a lesser amount.

We all have to face it, the fact is there is no more quick fixes to straightening out your credit, but there is a still a way to truly be free from delinquency and obtain a good credit rating.

Deborah Cook has worked in the finance industry for over 2 decades, specializing in educating people about finance advise, real estate investing, and credit counseling. To begin cleaning up and re-establishing your credit without IRS penalties pending, o to www.MsDebbyDeb.com