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How settling debt can affect your taxes

Created: On March 22, 2011 @ 7:09 pm In

Debt settlements with credit card companies and other creditors have become more common as people look for debt solutions. Having a creditor approve a [1] debt settlement plan can allow you to completely wipe out credit card debt and make a fresh financial start. But with the deadline for filing income taxes looming, it’s important to understand how a debt settlement may affect your taxes.

What is debt settlement?

Debt settlement usually occurs when a creditor agrees to accept a lower payoff than what you actually owe to them. For instance, if you owe $15,000 in [2] credit card debt but are able to make a lump sum payment of $9,000 from savings or a windfall you receive, your creditor may agree to forgive the remaining debt and you would not have to pay it. Most creditors won’t even begin to discuss debt settlement until you are behind on payments by at least two months and sometimes longer.

Forgiving credit card debt

Even though you would no longer be responsible for paying back the amount of any debt that was forgiven, you could be looking at a tax bill from the Internal Revenue Service (IRS). That’s because unforgiven debt of $600 and up is considered to be income that can be taxed. Your creditor would mail you a [3] 1099-C form that shows how much debt was forgiven and it would be used when filing a tax return. If you have not received a 1099-C from a creditor that forgave some of your debt last year, contact them to request the form.

Not all debt that is forgiven by creditors is necessarily taxable. That’s why if you are unsure about your situation it is best to consult with a tax adviser who can help sort everything out.

Article printed from DebtHelp.com Blog: http://www.debthelp.com/blog

URL to article: http://www.debthelp.com/blog/2011/03/22/how-settling-debt-can-affect-your-taxes/

URLs in this post:
[1] debt settlement: http://www.debthelp.com/debt-consolidation/settlement.html
[2] credit card debt: http://www.debthelp.com/credit-help/
[3] 1099-C form: http://www.irs.gov/pub/irs-pdf/i1099ac.pdf