Tax Consequences of a Debt Settlement Program: 1099c

When considering whether or not to use a debt settlement program, take into consideration the tax implications. It is likely that you will need to file a report with the IRS stating that some of your debt was forgiven. The IRS treats this forgiven debt as income to you, since you would otherwise have had to pay out that amount of money. Before agreeing to any debt settlement, do consider how this may affect your taxes this year. If you are unsure of how it will affect you specifically, speak to your attorney about your options.

The 1099c

Once you have reduced your debt through a debt settlement company, you will need to file this with the Internal Revenue Service. This must be done whenever any debt is forgiven or canceled. The debt is treated as income. Keep the following in mind as you determine if this is the right move for you to pay down your debts.

• All creditors and debt collectors who agree to accept a debt settlement for at least $600 less than what the debtor owes to them as payment in full will file a 1099c for you with the IRS.
• You will receive a notice at the start of the year, or sometimes after the debt is forgiven, documenting this IRS filing.
• You must report any amount on the 1099c to the IRS yourself as income. If you do not do so, you may be charged with violating tax code and you may be subjected to an audit or fines.

The problem with this type of tax implication is that most people simply do not know that they need to file this information with the IRS and that leads to further tax complications for the individual. The key is to realize that any time you have income over $600, you must report that income to the IRS. The IRS considers all forgiven debt (only the amount you did not pay) to be income. For example, if you owe a lender $8000 and the lender agrees to settle the debt for $6000, the creditor is required to report the $2000 forgiven debt to the IRS and you will need to do so as well.

Hire an Attorney

Work with an attorney to minimize your debt through a debt settlement program. Your attorney can anticipate what amount of forgiven debt will be reported and will help to determine if this is a further financial strain on you.