Debt Settlement And The IRS

Debt Settlement And The IRS

Debt settlement or forgiven debt is considered income by the IRS and incomes, as we know, are taxable. It’s, of course, not popular with people, as it appears as if the government is making life harder for consumers, by taxing them, for availing debt relief.

Since we cannot do anything about that, let’s just discuss briefly how the IRS taxes forgiven debt. Creditors are mandated to write off debts that have not been paid (uncollectible) for a period of time (which varies from 6 months to 3 years) and report them as lost income. The reason behind that is so they can save on their taxes. So then the IRS equates that as the consumer, you, gaining some, that’s why you are being taxed on that forgiven debt.

The debt types that are under that law are forgiven debt after a foreclosure, property repossession, and your credit card bill after debt settlement.

Any forgiven debt that’s $ 600 or more must be reported as income on the IRS Form 1099-C at the end of the tax year. The creditors should send you that paper but if you don’t receive it, they would report it anyway, only–instead of just a tax bill from the IRS, you might get an audit notice, which might cost you more than just your tax bill.

If you’re insolvent (your debt exceed your assets) before the settlement (and your creditor approved it) then you are exempt from paying the tax.

Other exempt cases are: debts cancelled in a disaster like Huricane Katrina and student loans that are payable upon employment in the same company.

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