Unpaid debt can result in a variety of tax consequences. Often, the nature of the consequence will depend on the type of debt at issue. Generally, if the unpaid money is actually tax money owed to the government, it may negatively affect the defaulting party. For example, unpaid tax debt on a property can lead to a tax lien, which may allow the property to be seized and sold to meet the tax debt.
If someone owes a debt but doesn’t pay it, the lender might be able to deduct some taxes. This is called a “bad debt deduction.”
What Is a Bad Debt Deduction?
A bad debt deduction is a form of tax relief for instances where a lender loans some money, but the borrower fails to pay them back. In order to provide some offset for their income, the bad debt deduction allows lenders to make a special type of deduction.
There are two types of bad debt deductions, business bad debts, and non-business bad debts. For each of these categories, there are different filing and eligibility requirements. However, business bad debts are generally treated more favorably than non-business bad debts. The nature of non-business bad debts may be more personal and informal.
What if I Have Issues With Unpaid Debt?
A tax debt that goes unpaid can sometimes be a problem, but it doesn’t always have to lead to a negative tax consequence. For instance, discharging tax debts through bankruptcy is sometimes an option. A lien will not be placed on the property of the person. Unpaid debts are a common problem. Fortunately, options are usually available to the debtor to at least lessen the debt burden in some way.
How Low Can a Credit Score Go?
The number is 300. This is the lowest your FICO (a person’s credit score calculated with software from Fair Isaac Corporation) score can fall. Your credit history is something you carry with you wherever you go. It’s like your financial lineage. Sometimes it’s favorable; sometimes it’s completely against you.
What factors are considered in determining FICO? A creditor will usually contact a debt collector if you miss four or more payments, accruing too much debt. Credit bureaus receive messages from debt collectors, which directly affects your credit score. If the collection is on a credit card or loan, your credit score will drop. Late payments and subsequent charge-offs will have harmed your credit score when your account is collected.
Similarly, this will result in a delinquency alert on your credit report. A delinquency alert red flags to potential lenders, letting them know you haven’t kept up with payments. Negative information, such as delinquencies or bankruptcies, is generally removed from your credit score after seven to ten years. The good news is that financial lenders won’t view you as deceitful forever. Unfortunately, they will for at least seven years.
Generally, original creditors can send your account to a collection agency once it’s 31 days past due, though some creditors may attempt to collect the payment on their own for up to 180 days.
Don’t panic on day 31, however, and don’t think you have half a year to figure this out. According to industry experts, it usually takes about 60 days for an unpaid debt to be sent to a collections agency.
The debt collection agency has been hired by the company that owes the money. If you pay the debt collector, that money will eventually make its way back to the entity that is owed the money, although the debt collector will take a sizable commission, often between 25% and 45%.
Occasionally, debt collectors will sell the debt they bought to another collector who feels he might have a better chance of convincing you to pay up. Any debt collector who owns the debt you owe will seek you out.
One Month Late
If you’re late on your payment, you will likely be charged a fee – these can vary depending on the situation, and although it wouldn’t be the worst-case scenario, it would be extra money you can avoid if you pay on time. A late payment can also lower your credit score by a few points. In addition, you’ll receive regular reminder calls and emails from your lender.
After the first late payment, the bank will attempt to contact you, and if that fails, a foreclosure order will be issued.
Two Months Late
Apply the same measures previously mentioned, and add the word “definitely” before the late payment appears on your credit report – because it will happen. If it’s a credit card, the interest rate will rise, which means you’ll have to keep paying the bank additional money on top of what you already owe.
From this point on, the lender may issue a recovery order, which means you will lose your car and still owe the lender! There is still a difference between the current sale price of your car and the amount you owed at the time of recovery.
Three Months Late
As delays continue to apply and interest accrues, your total charge will continue to rise. The company will probably offer you payment plan options and settlements if the debt is not secured by a car or home. You can ask for these options if you are not offered them. Financial institutions generally won’t negotiate with you until 90 days have passed. The calls will also become much more aggressive.
Six Months Late
The credit cards are canceled – a charge-off occurs, damaging your credit record, as the bank feels you will never pay the debt. A collection agency could resell your debt if it was sold to them. Because each sale creates an additional alert on your credit report, the damage to your credit report and credit score is greater.
Fortunately, you will not go to prison. If you haven’t paid a debt and it’s considered that you’ve violated a legal contract, the collection agency or the bank may bring you to court. Losing one of these judgments usually results in the following:
- Withholding a portion of your salary;
- Putting your bank accounts on hold;
- Your home may be seized in some cases;
- Your credit history will be severely damaged in all cases.
Having read all the nuances of not paying a debt in the U.S., you probably realize that skipping a month or two is a big deal. In addition, it will negatively affect your chances of getting a job, renting or buying a home or car, and even getting a mobile phone.
If at all possible, don’t skip monthly payments.
Making every effort to pay off your debt pays off – or, at least, you save a lot of money. Call the bank to negotiate a grace period if you cannot make the payment for a month or two. Generally, banks are very flexible if they see that you are willing to pay and are notified in advance. Be proactive to avoid complications in the long run.
Do I Need a Lawyer to Help With Unpaid Debt and Tax Consequences?
Debt and tax issues can often be very difficult to resolve. You may need to hire a financial lawyer if you have any questions or concerns about these types of legal issues. An attorney can give you legal advice based on your particular circumstances. In addition, if you need to file a claim, your lawyer can represent you in court.