Debt settlement might sound like the best option for you. Besides, many companies “claim” to be able to help you settle for half of what you owe. What they don’t tell you is that after paying their fees and increased taxes, you barely save anything.
Taxes on Forgiven Debt
The Internal Revenue Service considers any forgiven debt amounts as a form of income. The amount forgiven is similar to a gift by the creditor.
This may not sound like much of a gift if you have incurred substantial finance charges and fees over the years. However, some of it is likely principal that you are not having to repay. Whatever you bought with that credit account plus any borrowing costs that you do not have to repay is considered a gift.
You may not realize right away that your forgiven debt is subject to taxation. This unpleasant surprise comes as Form 1099-C, which is an income statement that is electronically reported to the IRS. You must include this on your income tax return. Form 1099-C is required for any forgiven debt amount of at least $600.
Saving $5,000 on a $10,000 debt is a decent savings. As long as you negotiate your own settlement, then you do not have to pay an additional $750 (plus their monthly fees) to a debt settlement company. You still may end up owing over $1,000 in income taxes. In addition, your credit score will suffer, so it is best to evaluate your options to determine your best steps to move forward.
A single large debt that you can settle on or even medical bills can be reasonable targets for debt settlement. Multiple credit cards should generally be handled through credit counseling.
If you do need help handling Form 1099-C, you can get free income tax preparation assistance through a Volunteer Income Tax Assistance (VITA) site. There are many coalitions nationwide (similar to Wake EITC Coalition) that participate in this free service. Simply call 211 from a landline telephone and request your closest free tax site.
Tags: debt settlement forgiven debt, Form 1099-C