Disclaimer – We are not lawyers or tax professionals and we are not giving legal or tax advice. These are merely some options and information about taxes. Consult an attorney or tax professional in your area to determine all your options.
What Are the Tax Consequences of Debt Settlement?
Debt settlement can be a decision that saves you a ton of money. However, debt settlement can also have some fallout potential with the IRS. Did you know that debt settlement for less than the full amount can possibly result in tax consequences? If you are thinking about settling a debt for less than the total, you should understand the possible tax consequences.
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Tax Consequences of Debt Settlement
When a creditor writes off all or part of a debt, that creditor can turnaround and then report it to the IRS as lost income and the creditor’s tax burden is reduced by doing this. However, that means you could be responsible for that lost amount. Your forgiven debt or partially forgiven debt can be considered income and you could pay income tax on it. It can even apply to foreclosures.
If you can prove to the IRS that you are legally insolvent, you usually won’t have any tax consequences. If you are insolvent, which means your debts are more than your assets, you may qualify for an exemption.
Also, if you decide to move forward with a debt settlement company like Pacific Debt, you can write off any fees you have paid.
The 1099-C Cancellation of Debt Form
If you are forgiven $600 or more of the original balance, not including interest and fees, the creditor may send you a 1099-C form at the end of the tax year. The amount on this form is now considered income and must be reported to the IRS. The creditor will report it to the IRS in order to lower their tax burden.
If you do not get a 1099-C, don’t assume the IRS doesn’t know about the write-off. Your creditor may of submitted one to the IRS at some point. If you don’t declare the deficiency balance, you may receive a tax bill plus interest and penalties. And here’s a fun fact about the IRS, they may forgive your tax burden, but they usually don’t forgive your penalties and interest!
How does a 1099 C affect my tax refund?
A 1099-C may affect your tax refund depending on your income and other taxable considerations. Talk to a tax professional if you are filing a 1099-C and see if you qualify for an exception.
What to do if you receive a 1099 C Form?
If you have received a 1099-C from one of your creditors, you need to report the settled debt amount to the IRS as income. You could always ask the creditor yourself if they intend to file a 1099-C with the IRS.
How Much Tax Do You Pay on Forgiven Debt?
The amount of tax you pay on charged off debt depends on your unique situation and your marginal rate of tax. You are considered insolvent if your liabilities exceed your income when you settled the debt. Ask a qualified tax specialist if you can take an insolvency exemption and get your tax debt forgiven.
Debt Settlement or Write-off Tax Consequences
If you are in a debt settlement program, remember that you may have to pay taxes on forgiven debt. Find out if the creditor will be submitting a 1099-C, and if so, the exact amount they will declare on it. Next, keep your eye out for the form after the first of the year. And finally, make sure the 1099-C is correct before you submit it to your tax specialist. If it isn’t, contact the creditor to have it corrected.
If you are curious how much you may owe, check out a debt forgiveness calculator to get an idea. Remember that this is based on simple information and may not be absolutely correct.
Debt Settlement and Your Credit ScoreYou will most likely see a negative effect on your credit score from debt settlement but most likely at this point you are already having difficulty paying your bills and may already be experiencing a drop in your FICO score, otherwise known as your credit score.
The good news is once you complete our debt settlement program you can then work to improve your credit score and repair your credit. Our debt settlement program can last years in order to help you reduce your debt so if maintaining a high credit score is your priority, debt settlement might not be for your current financial situation.
You can find out your credit score on any one of the credit bureaus. Once you can access your latest credit report, you can see all the items on your credit. You should check your credit report often to see if anything has changed. If your credit score drops from good credit to bad credit, you’ll going to want to know about it immediately.
You should also keep a watchful eye out for identity theft. Identity theft is rising rapidly and can ruin your credit. Always look out for negative information and make sure its correct. If you see incorrect information on your credit report you need to dispute it right away.
Pacific Debt, Inc
If you’d like more information on debt settlement or have more than $10,000 in credit card debt that you can’t pay, contact Pacific Debt, Inc. We may be able to help you become debt free in 2 to 4 years. We have settled over $250 million in debt for our customers since 2002.
Pacific Debt, Inc is accredited with the American Fair Credit Council and is an A+ member of the Better Business Bureau. We rate very highly in Top Consumer Reviews, Top Ten Reviews, Consumers Advocate, Consumer Affairs, Trust Pilot, and US News and World Report.
Pacific Debt is currently providing debt relief coverage in the following states:
Alabama, Alaska, Arizona, Arkansas, California, District of Columbia, Florida, Hawaii, Iowa, Idaho, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Michigan, Minnesota, Missouri, Mississippi, Montana, North Carolina, Nebraska, New Mexico, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Utah, Virginia, Wisconsin
For more information, contact one of our debt specialists today. The initial consultation is free, and our debt experts will give you all your options.