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Be Careful of the Forgiven Debt for it is now Taxable

Debt settlement may seem like light at the end of the tunnel as you finally find a way to get rid of all the debts that you previously owed without having to actually pay off the entire loan amount. In cases of debt settlement, you may have to negotiate with your creditors or take some help from attorney debt settlement for the same. This negotiation will eventually lead to an amount that will be much smaller than what you actually owe. It is a known fact that your inability to pay off the debts will reflect in your credit report; however, this can easily be repaired by being consistent with your settlement payment. Therefore, the overall package of debt settlement may not necessarily come across as a bad one. Nonetheless, you need to take into consideration certain other factors that can actually stir up some trouble for you when you opt for debt settlement.


Once you have paid off the entire debt amount that had been negotiated by your creditor, you cannot think of breathing a sigh of relief, for once the debt settlement process is complete, you may have to face the wrath of the tax collectors. Therefore, you should not be surprised when the 1099 – C notice reading cancellation of debt tax comes across in their mailbox one fine morning after all the debt has been settled. To put it simply, the amount of money that was forgiven and was not required for you to pay to the creditor is essentially the income that you have earned as per the authorities and since the particular amount is treated as income, it is most definitely eligible for taxation. The magic number in this case is $600. If the creditors have forgiven more than $600 of amount in the process of debt settlement, they are required to take legal tax action. The filing of the 1099 – C is a must and it is equally important to send the debtors a legal notice concerning the same, which explains the notice in your mailbox.

To clear out any foggy situation that may have conjured up in your head, take a hypothetical amount like $10,000. If you owe your creditor a sum of $10,000 and the attorney debt settlement negotiation comes down to $7,000, then $3,000 is the amount that you were forgiven and therefore, you are eligible and required to pay a tax on this $3,000 under ‘other income’ criterion when filling your form for the same.

While this is extremely important, you may try to put this to the backburner, which is absolutely wrong and should not, in any way be practiced. Sometimes, there is a possibility that you may not be aware of the existence of the 1099 – C section and therefore, if you do happen to get any mail from your past creditors, with whom all of your debts have been settled, you may treat is as an unimportant pleasantry exchange session and discard the letter. Therefore, it is very essential that you take careful steps.
Sometimes, your disregard to the legal system and your incapability to file for the 1099 – C section may land the honest tax payers in trouble by means of audits, checks, fines and the likes. It is therefore important that you educate yourself about this tax system and if you do happen to come across certain hurdles, you must ask your attorney to get a clearer picture.

Therefore, when you do receive the 1099 – C form after your debt settlement has been looked after, you must do anything but ignore it; preferably consult with your tax adviser who will guide you with the further steps to be taken.

Marcie Devon is a professional writer and also owns a consulting firm that offers services ranging from student counselling to legal advice. She has recently worked with an attorney debt settlement. She is fond of arts and loves working with her young girls for school projects. Click here to get debt help.

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