Debt consolidation started off as a personalized debt pay off strategy, but later on got developed as a professional debt relief service, that is now provided by many debt help companies.
One of the most effective ways to pay off debts, debt consolidation always takes a higher position when compared to debt settlement or say for instance bankruptcy.
The question, dealt here, is not about how debt consolidation tackles your personal and/or household debts, even though there might be occasional touches on the subject, rather we will be throwing light on a more important aspect of debt consolidation.
They want to know, whether or not debt consolidation fees are tax deductible!?
One simple answer can be, ‘No’!
The fees you pay to any debt law firm or a debt relief company for a debt consolidation service are not tax deductible.
Still, there are a few ways you can get tax deductions if you are planning to consolidate your debts.
Stay hooked on to this post to know,
How you can get help with tax deductions while doing debt consolidation:
First thing’s first, you will not be able to show your professional debt consolidation fees on your tax return as a deductible expense.
These fees include anything from a consultancy fee, charged by a debt consolidation company, or any service fee issued by a lawyer, debt law firm, and/or a debt relief company.
Throughout this post, we will use debt consolidation company and debt relief company interchangeably, as debt consolidation program is a subsection of debt relief, and a debt relief company should be able to provide you with debt consolidation services.
Now, the biggest irony is that, you won’t get any tax deductions if you are doing professional debt consolidation.
Only if you can choose to consolidate your debts on your own, like say a DIY debt consolidation strategy, probably then you will be getting to claim some tax deductions.
But there’s a catch. To get tax deductions, you need to transform your unsecured consumer debts into secured debts. And, this process can get you into deep troubles if you are unable to pay off the secured debt later on.
By secured debt you will be leaving an underlying asset for the debt, which your lender will take away whenever you start to default on the debt payments.
And, most of the times, it doesn’t make sense at all to convert unsecured debts into secured debts.
In what ways can you convert your unsecured/consumer debts into a secured debt, so as to consolidate them and get some tax deductions?
I won’t elongate this part too much. If you are having multiple debts with significant debt amounts on each of them, then you can easily take out a Home Equity Loan equalling your total debt amounts.
You can also open a HELOC (Home Equity Line Of Credit) that will work like a credit card, but leave your home equity as collateral.
You can take out any amount of cash you want against your equity, whenever you want, with the help of HELOC, but you have to repay it again pretty fast.And, this is where the whole game changes.
Suppose you have consolidated all of your existing debts with a Home Equity Loan, and have cleared all the debts you had till date.
You are then left only with this loan to pay off. You can be pretty sure, that you will be paying interests on this loan too.
And, any interest you pay on a secured debt that uses home equity as collateral, is tax deductible. This will, without any doubt, help you to reduce taxes up to some extent, if not much!
But, guess you have already figured out, that taking out a Home Equity Loan, or opening a HELOC, is totally a DIY debt consolidation option, where you will be the one, who makes all the decisions, and by no way a debt relief law firm or a debt consolidation company will help you.
Hence, it is your call. Whether you want tax deductions by taking out a risky home equity debt, or get professional help with no scope of tax deductions at all, but pay off your debts easily!
If the debt amounts are too huge, and you are also having enough built in equity, then probably converting your unsecured debts into a secured equity debt, and then get tax deductions on the interest payments, is a feasible option.
On the other hand, if you believe that getting proper guidance, and a negotiated interest rate with one single monthly payment makes more sense, then approaching a debt consolidation company is the most appropriate option for you.
With proper help you can
- Lower your monthly payments
- Reduce credit card interest rates
- Waive late fees
- Reduce collection calls
- Avoid bankruptcy
- Have only one monthly payment