Tax Consequences in Debt Settlement | Summary and Q&A

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September 21, 2017
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Consumer Warrior
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Tax Consequences in Debt Settlement

TL;DR

Debt settlement agreements can lead to tax consequences, as forgiven amounts over $600 are treated as taxable income.

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Key Insights

  • 🥺 Debt settlement can lead to tax consequences in the form of receiving a 1099C for forgiven amounts over $600.
  • 🚕 The tax liability from debt settlement should be considered when evaluating debt relief options.
  • 💦 Working with a CPA or tax professional is recommended, especially if you have engaged in significant debt settlement in a particular year.
  • 🚕 Insolvency at the time of entering into the debt settlement agreement may provide exceptions to the tax liability.
  • 🚕 Debt discharged through bankruptcy is treated differently from debt forgiven through settlement and does not result in tax consequences.
  • 👻 The tax consequences of debt settlement can significantly impact the amount of taxes owed, especially for individuals settling large amounts of debt.
  • 🚕 It is crucial to be aware of the potential tax liability and seek professional guidance to navigate the complexities of tax rules related to debt settlement.

Transcript

  • Hey, everybody. John Skiba here from the Arizona Consumer Law Group. I'm also founder of the Consumer Warrior Project. On today's video, I want to talk about some of the tax consequences you can have when you settle debts. Now, let's say you owe a bunch of credit card debt. You're looking at your different options as far as how you can actually d... Read More

Questions & Answers

Q: What are the tax consequences of settling a debt for less than the owed amount?

When a debt is settled for more than $600 less than the owed amount, the creditor or debt collector must send a 1099C form, and the forgiven amount is considered taxable income. This means you will be taxed on the forgiven amount as if it were additional income.

Q: Are debt collectors required to disclose the potential tax consequences during negotiations?

Debt collectors often do not bring up the tax consequences of debt settlement during negotiations, so it is crucial to be aware of this potential issue and understand the tax liability that may arise.

Q: Can the tax liability from debt settlement be significant?

The tax liability can vary depending on the settlement amount. For individuals settling substantial amounts of debt, such as $100,000 for $50,000, receiving a 1099C for the forgiven $50,000 can have a substantial impact on the taxes owed.

Q: Are there any exceptions to the tax consequences of debt settlement?

One exception is if you are insolvent at the time of entering into the debt settlement agreement, which means your debts outweigh your assets. Consult with a tax professional to understand any potential exceptions and avoid unnecessary tax payments.

Summary & Key Takeaways

  • Debt settlement can be an option to deal with credit card debt and negotiate a lower payment amount.

  • Settling a debt for less than the owed amount can result in receiving a 1099C form at the end of the year, as forgiven amounts over $600 are considered taxable income.

  • The tax liability from debt settlement can vary based on the settlement amount and may significantly impact the amount of taxes owed.

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