I wanted to take a break from the markets today and talk about debt for a bit.
One of the biggest financial mistakes people make is getting too deep into credit card debt.
Too much credit card debt can come back to haunt you in the event of a loss of income due to a job loss or illness.
Here’s an example. Let’s say you have $10,000 in credit card debt, suddenly lose your job, and find yourself unable to pay back the loan.
Eventually the credit card debt will go into default, and the credit card company will charge the debt off as a loss. You will then be hounded by debt collectors who purchased your debt from the original credit card company in hopes of recouping some, if not all, of the balance you owe for a profit.
Debt collectors have a seven-year window to legally collect the debt from you. If they fail to do so in that time limit, they cannot legally pursue the debt.
At that point, you may think you’re in the clear.
The IRS will recognize any debt that you have been excused from paying as income…and tax you accordingly!
So the $10,000 in debt you did not pay will be considered income as far as the IRS is concerned, and you may get hit with a tax bill of between $2000 and $3000.
So just remember, when it comes to credit card debt (or debt of any kind), you will pay one way or another.
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