Are there any tax implications of debt settlement? If so what are they?

Yes, there are tax implications of debt settlement. Generally, debt settlement is a debt management option to eliminate debts such as credit card, payday loans or medical bills. The creditor agrees to accept a lower payment than you owe in order to wipe out the debt. The portion that you don’t have to pay can vary according to the amount you owe. For instance, you or the debt settlement company you hire, may negotiate with a credit card company to settle your debt. Let’s say that the creditor agrees to cancel $500 of the $1,000 credit card bill you owe. You pay the money and the debt is gone. You may think you don’t have to worry about the cancelled amount. However, you do because there are debt settlement taxes on that amount.

You see, the Internal Revenue Service (IRS), doesn’t consider the cancelled portion of the debt as forgiven. In fact, the IRS considers the portion you aren’t required to pay as income. In other words, that cancelled amount is akin to making money at your job. Thus, you must pay taxes on this income.

Unfortunately, some debt settlement companies may not tell you about debt settlement taxes associated with paying off your debts. This means that the IRS can contact you about the taxes you owe on the cancelled portion years later. Thus, it’s important to contact a lawyer who specializes in debt settlement. The lawyer will explain all the tax implications associated with settling your unsecured debts.