Unsecured Debt Settlement: Process and Tax Implications

Millions of consumers are overburdened unsecured debt and are looking for viable solutions.  For many of these consumers, unsecured debt settlement may be the answer. 

What is Debt Settlement?

Debt settlement involves negotiating with a creditor to reduce the payoff amount of a debt.  A consumer may use debt settlement to reduce a variety of unsecured debts including, but not limited to: 

  • Credit card debt;
  • Medical bills; and
  • Certain tax debts. 

How Does Debt Settlement Work?

Debt settlement procedures may vary depending upon the type of debt involved and the collection and debt work-out policies of the creditor.  

Credit Card Debt - Most credit card companies require a consumer to be four to six months behind on his payments.  However, some credit card companies will not engage in debt settlement negotiations.  Only after these companies have turned the account over to a collection agent will the consumer be able to begin debt settlement negotiations.Regardless of a creditor’s policies, a debt settlement agreement typically allows a consumer to pay as little as 40% of what he actually owes on a credit card debt.

Regardless of a creditor’s policies, a debt settlement agreement typically allows a consumer to pay as little as 40% of what he actually owes on a credit card debt.  This reduction in the amount due can result in significant savings for the consumer.  Depending on the creditor, the consumer may be required to pay the settlement amount in a lump sum or monthly installment over a specific period of time.    

Medical Bills – Some medical providers are willing to settle a medical bill, especially if the consumer does not have insurance or has little income.  In most instances, the creditor will expect to receive the settlement amount in a lump sum. 

Tax DebtsIn some instances, a taxpayer may be able to negotiate a settlement, known as an “Offer in Compromise” with the IRS.  State taxing authorities are also willing to negotiate settlement of tax debts. (See also Will Debt Settlement Affect Taxes).

What are the Tax Implications of Unsecured Debt Settlement?

Any amounts forgiven by a creditor on an unsecured debt are treated as income for tax purposes.  The creditor will send the consumer a 1099-C which reflects the amount forgiven on the debt and the consumer must list this amount as income on his tax return. 

Getting Legal Help

You should insist that the creditor provide you with a written document which set forth the terms of the debt settlement agreement before you pay any money on the debt. Before you sign it, you should have the agreement reviewed by an experienced debt settlement attorney to ensure that it is legal and to make sure you understand it.

Talk to a Lawyer

Need a lawyer? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
NEED PROFESSIONAL HELP ?

Talk to a Debt Settlement Lawyer.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you