Tax Implications of Debt Settlement

Debt relief is the new mantra for all those reeling under heavy debts. With this program, you can come to an agreement with your creditors so that the amount you owe is reduced considerably to your advantage and the balance is forgiven. With the laws revolving around bankruptcy becoming more and more difficult, people are opting for debt settlements as an easier option. However, as with life, nothing is simple and straightforward. When you opt for debt relief, the creditors not only forgive your remaining sum, but also report the same to the IRS. So, now you owe tax on the money that you didn’t have to pay.

Pros of Debt Settlement

Many argue against debt settlement approach for the reason that you end up paying taxes on the cancelled amount. But the truth of the day is, even if you owe taxes on the unpaid balance, it is still a better option to go for debt relief. Why? Because, the net amount along with the taxes that you owe will still be less than what you originally owed.

Before you file your returns find out if your particular debt settlement is taxable or not. Not all debt that is cancelled is taxable. Cancellation of the balance in home loans in particular conditions, bankruptcy, insolvency, farm loans and some loans in which they can repossess the item are all exempted from tax.

Another advantage, as it may seem, is many a times taxes are not really levied on the debtors because of the insolvency rule as described by the IRS. Many debtors who find themselves in such dire straits are those whose liabilities outweigh their assets. When your net worth is less than what you owe, you are said to be an insolvent debtor. If so, you can fill out an IRS Form 982 and submit it along with your tax returns so that you will be exempted from being taxed on your savings.

Cons of Debt Settlement

Apart from the tax consequences, which many think is the biggest objection there are a few other hitches in opting for debt settlement. For example, when you go for debt relief options, there is a possibility that your credit history and score take a beating. Debt collectors can harass you with constant calls and reminders for you to pay the money. Also, when you choose debt relief, you may have to choose a settlement with individual creditors, which can become quite tedious.

Getting Legal Help

Debt settlement is often considered as an alternative to bankruptcy and therefore it becomes imperative for you take a legal expert view on debt settlement tax issues. An expert will work fundamentally at all the levels of your debt relief requirement and help you resolve your debt through proper negotiation depending on your condition.