In a column of the L.A. Times, writer Liz Weston went over the two measures of tackling debts: insolvency and liability reimbursement. This article will develop from her work.
This is a straightforward technique whereby you can solicit your account payables for a discount. You could try discussing yourself or employ a representative for you.
If you are successful, you may be asked to remit the balance in one installment or several ones. It may be unfavorable or suspicious to pay it right away as this may seem like you could have managed the discounted sum as well.
Advantages of Liability Reimbursement:
- You could resolve your liability issues. This may work for all or a few creditors.
- Your financial history shall not be blemished with an insolvency record.
Disadvantages of Liability Reimbursement:
- Free-Rider Hit: Entities may be skeptical of your inability to reimburse your dues, demanding that you provide attestations of your financial stance. Should they find out that you have other creditors, they may also demand that you remit them less money instead.
- Asking you to sell your resources: Your account payables may ask you to sell certain expensive assets or take out a mortgage on your properties.
- Tax Obligations: Once you negotiate a lower debt, your creditor may disregard the discounted sum as irrecoverable debt. You, alongside the tax jurisdiction, would then be sent a form 1099-C.
Therefore, the irrecoverable debt would be considered your income (even though you are not actually getting anything), and you would owe tax on that. This is regarded as income because, from your perception, the released debt may be considered as you generating income and remitting with that cash.
In another way, you were granted a financial surplus as you no longer owed that debt. Also, the creditor lost their income as they let go of the account receivable. This, in turn, has enabled the tax officials to lose their income. Hence, they impose that amount on the person who earned the lost revenue- you.
Incapability to remit dues: If your creditor agrees on a reduced sum, but you later find yourself in more trouble that renders it difficult for you to reimburse the remaining dues, you may be contravening the agreement. This may cause the beneficiary to file a lawsuit against you and even take over your resources till you remit the required amount.
Clearly, liability reimbursement is not always the solution. Keep on reading to learn about insolvency.
This method entails two discrete procedures whereby you could handle your liability issues. The most frequently sought is Chapter 7 insolvency, which frees you from all obligations without reimbursing your creditors.
Alongside releasing you from the commitment, it enables you to dodge tax remittance according to a clause in the Internal Revenue Code, which does not regard debts forgiven as income.
However, you may find that your earnings exceed the parameters laid for Chapter 7 insolvency. In such cases, you may follow Chapter 11 or 13, which requires you to suggest a schedule by which you will reimburse your dues based on your capability and net worth.
At first glance, this may seem comparable to liability reimbursement- but it is crucial to note that there are two fundamental dissimilarities:
You need to negotiate a lower amount with your creditor in liability reimbursement, but in bankruptcy, the creditor will be obliged to accept the terms when a tribunal approves your Chapter 13 case. If you need to put those clauses into effect, the whole jurisdiction of the U.S. Federal Government is there to back you up.
You do not have to remit any tax charges for Chapter 7 insolvency.
Only Chapter 13 has been highlighted here- this is because, in Chapter 11, creditors reserve their rights to elect the plan they want. Hence, as can be expected, it would be advisable for you to seek a Chapter 7 or 13 insolvency.
Advantages of Insolvency:
- You are released from the debtor are granted a more favorable reimbursement schedule.
- You do not have to pay any tax.
Disadvantages of Insolvency:
- The insolvency record will stay in your history for a decade. Notwithstanding, you may still be able to get credit and other loans. But it may take some time for the interest charges to drop and other balances to rise.
Furthermore, certain individuals may be resistant to go into insolvency. Should you be one of those, it may be beneficial to acknowledge the following points:
- Insolvency as written in the Bible:
Every citizen was required to declare insolvency every seven years in primeval Israel because the Bible required creditors to release their debtors. God did not want people to be committed to debts.
- Insolvency as Entitlements:
Under the Insolvency Code, all citizens of the U.S. are entitled to declaring insolvency. As such, Congress reserves the authority to make these changes all over the nation.
- Successful individuals who were once bankrupt:
Many presidents, who went bankrupt at one point during their lifetime, have their emblem registered on our currency.
Moreover, several other individuals procured success later, such as Walt Disney, Henry Ford, and Milton Hershey.
However, this should not let insolvency be misconstrued as the ideal path. Every case is unique, and you need to think further into the future. If you believe substantial debts will not tie you down in the next five years, insolvency could be avoided. Otherwise, it would be worthwhile considering this option.
Many individuals in the state of California are considering declaring insolvency to liberate themselves from overwhelming debts. If you are one of them, be sure to consult an accomplished insolvency attorney to stand for you.