Debt Consolidation

How Debt Settlement Could Affect Your 2018 Taxes

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With tax season coming up, you may have already received information in the mail you’ll use to file your 2018 taxes. These statements may include a W-2 from your employer and a 1098 from your mortgage lender.

If you settled debt on your own or with the help of a debt settlement company like Freedom Debt Relief in 2018, you may also receive an IRS Cancellation of Debt Form 1099-C.

If a creditor forgave $600 or more of your debt in the past year, the IRS may consider this forgiven debt a form of income. As a result, you may be taxed on this forgiven debt and need to complete and submit IRS Form 1099-C as part of your 2018 tax return.

How does the debt settlement process work?

Learn more here.

While Freedom Debt Relief is not a tax professional and cannot help you with filing your taxes, you can find out more about IRS Form 1099-C and how debt settlement could affect your taxes below.

What Is IRS Form 1099-C?

IRS Form 1099-C is a cancellation of debt form. It documents the fact that part of your debt has been forgiven through debt settlement or a similar process.

Your creditors may be required to send this Form 1099-C to you and the IRS at the end of the tax year if they reached a debt settlement agreement with you or your debt settlement company. If your creditor sends this form to you, you need to report the forgiven debt they’ve outlined as income to the IRS and pay taxes on it.

Why Is Your Forgiven Debt Taxable?

When you get your debt forgiven through debt settlement or a creditor chooses to stop pursuing the debt for another reason, the IRS still needs to account for the difference between the money you originally owed and the lesser amount of money that eventually resolved the debt. Your credit card company might be able to write off the difference as a business loss, but their loss could be considered your gain—specifically, your income gain.

Only the amount you saved on the debt is included in your 1099-C form, not the money paid to your creditor to resolve your account. So if you paid your creditor $6,000 to settle a $10,000, your creditor only reports the $4,000 they forgave in their 1099-C Form. And that $4,000 could be considered as part of your income.

Is There Any Way to Avoid Paying for Your 1099-C?

Possibly. If your debt was forgiven because you filed for bankruptcy, or if you can prove you were insolvent when you settled your debt, you could avoid getting taxed for your forgiven debt. Insolvency is when the value of your income and total assets is less than the amount you owed to your creditors.

To prove that you were insolvent and have the debt forgiven by the IRS, you can file Form 982 with the IRS. However, if your total income and assets were greater than the amount you owed when you settled your debt, you will likely end up being taxed on the debt you resolved over the past year.

What to Do Next

If you were not insolvent in 2018 and your creditors forgave $600 or more of your debt, you will have to pay taxes on your forgiven debt. Check the mail in the beginning of the year of Form 1099-C, but beware that your creditors may send this form to the IRS and not mail it to you. To review your taxes and discuss your From 1099-C, consult with your local tax professional.

John Russo is a Creative Manager at Freedom Financial Network. His goal is to make the world of personal finance more accessible so that everyday people can find the right financial solutions for themselves. In his free time, he enjoys hiking, reading pretty much anything, and spending time with his fiancée and two cats.