27 Oct I have $33K in debt after divorce. What are my options?

Q. I divorced in 2021 and all the debt was in my name and my ex-wife did not need to assume any of the marital debt. I continued to pay on my credit cards but not on the ones that she used as I was hoping she’d have to take that debt. It’s now $33,000 and it’s affecting my credit. A couple are in collections, but all of them are charged off. Recently, a debt consolidation company reached out to me to try to enter into a debt resolution fixed repayment plan. The statute of limitations for most of those cards is in two more years. What should I do next?
— Debtor

A. We’re sorry to hear you have this debt and that it’s now affecting your credit report.

Let’s get to your options.

In New Jersey, the clock begins to run for the statute of limitations from the most recent point of activity on the charges, payment, or credit card, said Karra Kingston, a bankruptcy attorney in Union City.

This “date of last activity” is usually when the borrower fails to make a scheduled payment on the account, she said.

However, if you make a payment with the debt settlement company, then this will restart the statute of limitations, she said.

“It is important to note that debt settlement companies are not always the right solution,” she said. “If you have large debts and don’t have the money to pay creditors, it is best to speak with a bankruptcy lawyer who does both settlements and bankruptcy so they can give you a full picture of your options.”

Generally, if you don’t do anything, it takes seven years for the late payments to fall off of your credit report, Kingston said, but sometimes it’s longer when debts are sold off and the new creditor can start reporting these late payments.

But, the creditors can start suing you and get a judgment against you if the statute of limitations has not run out.

A judgment means that they can garnish your wages, levy your bank accounts and put liens on any personal property, she said.

Kingston said there can be drawbacks to enter into a program with a debt settlement company and that not everyone is a good candidate.

“Debt settlement only works for individuals who have the money to make payments,” she said. “Many people end up getting sued because they can’t come up with the money to settle the debts.”

For example, she said, if a person owes Citibank, Discover and Chase but only has the money to settle with one creditor, the other creditors may sue them.

Next, she said, debt settlement companies aren’t able to settle all debts, and there are times when creditors won’t work with the settlement company.

Also, you should know that when debts are settled, it could mean a tax bill.

You would receive a 1099-C for any forgiven debt of more than $500, he said. This means that you may have tax consequences at the end of the year.

“For example, if a person owes $10,000 worth of debt and the creditor and debtor reach a settlement of $6,000, then the debtor may have tax consequences on the $4,000 forgiven amount,” she said.

Speak to some professionals who can look at the details of your debt and financial situation to help you choose the right path for you.

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This story was originally published on Oct. 27, 2022.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.