You May Be Able To Avoid A Debt Settlement Tax

Negotiation can be a great way to reduce your debt to amounts that you can pay off and still be able to eat. There is a possible tax item that you must be aware of however. Debt settlement tax is the taxes owed on the sum of money you are able to forgive through a settlement with a creditor. You may be off the hook however, and here is why.

First off, what is debt settlement?

A negotiation or settlement happens when a debtor makes a deal with their creditor to repay just a part of the total amount owed, in a lump sum, and the rest is forgiven. It's a realistic option for people to get out of debt without filing bankruptcy.

What is the debt settlement tax?

When you settle with a creditor, they are required to file an IRS form 1099 stating that the amount forgiven in a settlement is income and therefore taxable. This happens only if the amount is $600 or greater.

Will I be required to pay this tax?

You won't if you are considered insolvent at the time you settle. In other words, if you have a negative self worth, you owe more than you own, you are considered insolvent and therefore not required to pay the tax. Please see IRS publication 908, Bankruptcy Tax Guide. And be sure to consult with an attorney at tax time.

The tax on settlement is used to steer people away from settling

Many debt counselors use the threat of debt settlement tax to scare clients into not considering settling. This is unfortunate as most people that would benefit from debt settlement will not be required to pay the tax. Again, be sure to consult with an attorney.

Debt settlement is a viable option for many folks to get out of debt once and for all. As with everything though, there may be a catch. But don't let the threat of a debt settlment tax stop you from researching settlement. It may be a way out for you.