Debt Settlement, Taxes, and Your 2018 Filing
- Debt settlement can cause you to owe taxes.
- Forgiven amounts are considered income by the IRS.
- You may be able to avoid taxes by filing Form 982 if you are insolvent.
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 debt, your creditor only reports the $4,000 they forgave in their 1099-C Form. And that $4,000 could be considered part of your income.
So, while you’re likely to benefit overall from debt settlement, taxes will always be a factor.
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, 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 most likely have to pay debt settlement taxes. Check the mail in the beginning of the year for 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 Form 1099-C, consult with your local tax professional.
Learn more about debt settlement, taxes, and achieving financial freedom
If you’re struggling to keep up with your credit card payments or experiencing a financial hardship, then you’re doing the right thing by exploring your options for relief. Freedom Debt Relief can help you understand these options for dealing with debt, including our debt relief program. Let our Certified Debt Consultants help you make an informed decision. Find out if you qualify today.
*Editor’s Note: Freedom Debt Relief does not offer professional tax or legal services, and nothing in this post should be considered tax or legal advice. To fully understand your tax liability, consult with a tax preparer or other financial or legal advisors in your area.
Should You Borrow Money from Friends and Family in Hard Times? (Freedom Debt Relief)
Is Marriage Good for Your Financial Health? (Freedom Debt Relief)
Survey: How Americans Spend Their Tax Refunds (Freedom Debt Relief)