This article was written by Peters and Associates.

Ask: I’m about to file a big tax return and plan to use the money to pay off my old debts. Is there anything I should know?

Answer: Around this time questions like yours reach us every year in the office. Using your tax return to pay off debt is an excellent strategy, and it can be your ticket to becoming debt-free.

When you keep your debts on track, paying them off is easy; Just pay like any other month but increase the amount.

When dealing with creditors like big banks, credit card companies, and big loan companies, I usually recommend paying online at the creditor’s website. This tends to lower the potential for error. They pay off your debt at a $1 to $1 ratio and keep your credit report looking good.

However, if you are behind on your payments or are struggling to make them monthly, paying the bill directly may not be the best option.

Depending on the type and amount of debt, it may be advisable to conclude a debt settlement agreement with your creditor. Debt settlements can allow you to pay 20 to 40 percent of what you would have owed.

If settlements are done properly, you may be able to pay off all of your debt for a lot less money than you actually owe and eventually be debt-free. Because of this, paying off debt can be an especially handy option when paying off debt with a lump sum like a tax return.

Debt settlement tips

• Get everything in writing. Paying off debt can be a complicated process. If a debt is mispaid, you could end up owing more than your original balance.

• Don’t pay a dime until you have all the required documentation and understand the exact terms of the agreement.

• Law firms that deal with debt settlement and bankruptcy are typically able to negotiate better settlements than individuals attempting to pay their debts themselves or hiring non-law firms debt settlement firms.

• You can settle debts yourself in some cases, but the fees paid to lawyers for debt settlement are often offset by the lower settlement the lawyer can negotiate.

When to think about filing for bankruptcy

If you can’t fully pay off your current debts or get 100 percent out of debt within 12 to 18 months with a debt restructuring plan, you should consider using your tax return to retain a tax attorney and begin bankruptcy proceedings.

Bankruptcy can be a scary word, and while it’s true that it should be treated as a last resort, sometimes ripping the bandage off quickly is better than slowly peeling it off.

Struggling for years to pay off debt is painful, and that pain can get a whole lot worse if you end up having to file for bankruptcy anyway. If bankruptcy is inevitable or even very likely, avoiding it will only delay your eventual recovery. Bankruptcy recovery can be a simple process, but it takes time and patience.

The sooner you submit, the sooner you can redirect your path toward financial freedom.

Beware of scammers

They’re out there, especially during tax season. When dealing with debt, make sure all agreements are legal and in writing.

Pay attention to your credit rating

You should review your credit report every year. If you make a habit of checking your credit reports on tax day, you’re well on your way to checking them annually.

A time to reset every year

Tax season is a great opportunity to sit down and take a hard, honest look at your personal financial situation. Assessing your finances as a whole—what you bring in, what you spend, how much you save, what debt you incur, etc.—can be difficult, but it’s hugely important.

When you filed your tax return last year, did you promise yourself that you would get out of debt in 2015? Did you do it? If so, great. If not, if you make the same promise to yourself this year, maybe it’s time to consider your options, create a plan of action, and make some potentially difficult decisions.

°°°

If you have a question that you would like answered by an attorney in a future issue, please write to [email protected] or visit PandaLawFirm.com.

Please note: the information in this column is for general purposes only and should not be construed as legal or professional advice of any kind. You should seek advice specific to your issue before taking or refraining from any action and not rely on the information in this column.