How to Exchange Credit Card Debt for Tax Debt
When you owe money on your credit cards, the payments may start to become overwhelming. The only simple way to get out from under your debt is to pay it off. But paying off your debt might prove to be technically challenging even if the idea is simple. In these cases, your best bet may be to turn your credit card debt into a tax debt. Exchanging credit card debt to tax debt means that you'll owe the IRS money instead of owing your creditors money. This is a risky move, since the IRS tax debt cannot be written off. However, the IRS is normally always willing to work with you in regards to payments, and you may even be able to negotiate your tax debt for less than the full amount you owe.
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Instructions
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Write a letter to your credit card companies. Typing the letter will make it more professional. Date the letter. Make sure that you specify in the letter that you do not want to receive telephone calls from your creditor any longer. This will stop credit card companies from calling you. Your credit card companies will now have to correspond with you via the mail.
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Stop paying your credit card bills. When you stop paying on your debts you'll go into default on your credit cards. Normally, this tactic would only be used if you are already delinquent on your credit cards and are facing collection action anyway. By not paying on your credit card bills that are in collections, you will initiate charge-off action on the part of your creditor. A company will only charge off unsecured credit cards. If you have any secured credit cards, your bank will simply attempt to take possession of the property used to secure the charges on the card.
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Wait for the credit card company to send you a notice of charge-off. The credit card company will send you a notice indicating that if you do not pay your balance in full or make further payments on your card that the company will charge off your debt. A credit card charge off means that the debt is written off the company's accounting books as a "bad debt." This bad debt is then reported to the IRS. You will receive a 1099-C from the credit card company at the end of the year in which the company writes the debt off, effectively canceling the debt. This debt is treated as income. You must pay income tax on this dollar amount.
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File your taxes. When you file your taxes, you must include the amount listed on the 1099. Since the amount listed is treated as income, the tax on this amount will be a fraction of the amount you originally owed to your credit card company. If you have any itemized deductions for the year, you may further reduce the amount of money you owe in taxes. If you still can't pay the taxes due on your income, you may be able to negotiate your tax debt with the IRS, but you may need the assistance of a qualified tax attorney to help you fill out the correct IRS forms.
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Tips & Warnings
When charging off debt, you will seriously damage your credit rating. This strategy is an incredibly aggressive method of ridding yourself of debts that you have with your creditors. When you employ this method of exchanging credit card debt for tax debt, you may not be able to obtain a credit card for seven or more years afterwords.
