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Alternatives for resolving unmanageable debt

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Ohioans who have experienced a severe drop in their income have a few options to manage their debts. The first step is to speak with a certified credit counselor. These professionals can help people in a dire financial situation understand their options and give recommendations.

Debt consolidation and debt management plans may help people who can afford to make payments on their debts. Consolidation plans require credit card customers to refinance their existing debt into another account with a lower interest rate. The new account can be a home equity loan, zero-interest credit card or personal loan. With a debt management plan, a credit counselor works directly with creditors to reduce current interest rates and make the client's payments easier to afford.

There is a significant disadvantage to using one of these plans. If the creditor forgives a portion of the outstanding balance in a debt management or debt consolidation plan, the customer may be surprised by a large tax bill. Forgiven consumer debt over a certain amount is considered income by the Internal Revenue Service, and the creditor will issue a 1099 for the amount that wasn't paid.

Bankruptcy is another alternative for people who cannot pay their credit card bills. One of the most attractive features of bankruptcy is that balances forgiven by the court are not taxed as income. An attorney who focuses on bankruptcy cases may assist a client with limited resources who needs to resolve debt issues and stop collection actions by creditors. Individuals and married couples may have the option of asking for a complete discharge of their debts or a reorganization to make the debts easier to pay. An attorney might explain the differences and advise clients on which option is best based on their current financial state.

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