Reduced debt may count as income

There are signs that our country is slowly starting to rebound from this most recent recession. More companies are hiring, and this has led to more people being able to find work. The housing market seems to have stabilized, as more homes are being sold and home values are increasing as well.

Despite the positive signs that are emerging, there are still many individuals struggling with financial problems. They may have been out of work for some time, and have continued to accumulate debt while they were looking for employment. Some may have had to live on their credit cards, and now are unable to make the monthly payments.

When a person is experiencing difficulty making ends meet, there are several options that may be available to help recover from the challenges that he or she may be facing. For example, if the individual has significant credit card debt, it may be possible to try to negotiate with the credit card company to reduce the amount that is owed.

However, this may lead to potential problems later for the debtor. If a person has a credit card debt reduced, this means that he or she will be required to claim the amount reduced as income at tax time. For those who are living paycheck-to-paycheck, this "increase" in income could lead to more financial challenges.

Certain debts may be excluded from these requirements. Homeowners trapped in underwater mortgages may not be able to pay their mortgages. They can decide to try a short sale, which means that they sell their homes for less than they owe on the mortgages. Their lending institutions would then forgive the debt that is remaining.

In the past, this would also have been considered income to the homeowner, requiring that taxes be paid on this amount. Under the Mortgage Forgiveness Debt Relief Act, this is excluded from income for 2013. The law may be extended in the future, but struggling homeowners may want to act sooner rather than later to ensure that they are covered by this provision.

If an individual is still having financial problems after taking these steps, perhaps bankruptcy may be the best option. Once a bankruptcy is filed, the automatic stay goes into effect. This prevents creditors from pursuing collection actions, and gives the individual time to organize a plan that allows for the elimination of his or her debt.

Each situation will need to be examined to determine the proper course of action. If you are struggling to pay your bills, speak to an experienced bankruptcy attorney as soon as possible. Even if bankruptcy is not the right choice for you, this will allow you to understand what you need to do to regain control over your debts. The longer you wait, the worse these problems may become.