In general, if you have debt-cancellation income because your debt is canceled, forgiven, or forgiven for less than what you must pay, the amount of the debt canceled is taxable and you must declare the canceled debt on your tax return for the year the cancellation occurred. The most obvious remaining debt forgiveness exception for taxpayers is insolvency. You are considered legally insolvent when your total debts exceed your total assets. If you are insolvent, the forgiven debt is excluded from income tax, but only up to the amount in which it was declared insolvent.
It depends on the amount and type of debt you have, your current and future income, and the type of assets you have in your name. This exclusion is requested on IRS Form 982, which is used to declare the canceled debt that you are excluding from your income. For an extra level of protection, you can find out if debt relief companies must have a license to work in your state and confirm that the company you work with has the proper credentials. Once your debt has been settled, you'll make a single monthly payment, which will hopefully be a more manageable amount to the debt settlement company rather than to each individual creditor.
At 16 percent, medical debt represents the highest percentage of delinquencies, but consumers are also defaulting on student loans, auto loans, and credit card debt. It feels great to have your debt settled, canceled, or forgiven, but you should keep in mind that debt settlement has tax implications. The IRS treats the debt you have forgiven the same way as the money you receive in your weekly paycheck, as income, subject to the taxes you must pay. This area belongs almost exclusively to the area of debt settlement, but it could also include personal loans that you don't meet.
If you're concerned about how debt settlement programs may affect your tax liability, the best thing to do is to contact a tax professional who can help you determine if it's worth continuing with debt settlement. Debt settlement, or debt forgiveness, is a last resort option that can help debtors get out of overwhelming balances. Much like working with a credit counselor, debt settlement professionals speak directly with their lenders on your behalf. You can pay off your debt for less than you originally owed, but you'll have to claim the forgiven amount as taxable income.
Next, Tayne explains to Select how debt forgiveness works, what type of debt is subject to tax, and how debt forgiveness appears on her credit report. If a person's debt is so large that making payments is unmanageable (or if paying off balances would take an unthinkable number of years), consumers may be able to find relief by liquidating debts. You must declare the debt forgiven on your taxes and your creditor will send you a Form 1099-C that will indicate the amount that was canceled and the date it was canceled. And even if your creditor doesn't send you a 1099-C, you should declare the forgiven debt as taxable income, since you can never be sure that the amount hasn't been reported to the IRS.