Debt Settlement and Tax Issues

For many consumers seeking out a debt settlement program to help them solve their debt troubles, the issue regarding taxes seems to be rather unclear. While many consumers are aware of the fact that the IRS can tax you on the amount that you saved on a particular settlement, the majority of debtors are not familiar with the details surrounding the tax implications if you work with a debt settlement company. Here is a list of details that should help clarify who, when, and how you may be taxed on the savings from a given settlement reached while you are enrolled in such a program:

1. If the amount of savings is $600 or more on a particular debt amount you may be taxed on that savings by the IRS. If the savings are under $600, than you cannot be taxed on that amount that resulted from the settlement.

2. Any bank, credit union, loan company, credit card company, of financial organization is obligated to send you a 1099-C form to you, the consumer, as well as the IRS for you to fill out at the end of the tax year.

3. The consumer must report the amount of savings from the settled debt on that form as “income.”

Exceptions to these stipulations:

1. If you are considered insolvent at the time a particular settlement is reached. Insolvency refers to the situation where the debt amount of the consumer exceeds the total amount of that consumer’s assets. If you are solvent, your assets are worth more than your outstanding debt amount.

*If you calculate that your debt amount exceeds your assets and you are in fact insolvent, make sure you fill out an IRS Form 982 and include that form with your tax return so you are not taxed on your savings.

2. If you filed Chapter 11 bankruptcy and the debt was discharged.

3. The debt, if it is non-business, was actually cancelled as a result of Hurricane Katrina.

4. If you currently work for an employer or in the profession that you promised you would when you took out a student loan in the past.