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Author: S. Wallitsch Article source: http://www.articledeshboard.com/. Used with author's permission.
Debt negotiation can save you thousands of dollars in unsecured debt and can help you avoid the need to file bankruptcy. However, the government does not allow citizens to simply eliminate thousands of dollars in debt as if it never existed. For that reason, the IRS requires any debt cancellation for $600 or more to be reported as additional income on your 1099. While this information initially scares a number of consumers, there are two good reasons why this requirement should not affect your decision to join a debt negotiation program.
1. Paying taxes on cancelled debt does not prevent you from saving money; it just means that what you save may not be as much as you though. The IRS will ask for a percentage of what you saved, not the entire amount. Thus, you are still saving money. Keep in mind that although you may owe the government money, you are ultimately saving more than that amount since you settled the account for less than the outstanding balance and are also no longer paying the high interest rates that accompany credit cards.
2. The reality is that most clients in debt negotiation programs are never required to report their savings due to "insolvency". According to IRS Publication 908, insolvency is described as having more debt then assets. Thus, if you owe more than what you are worth at the time of the settlement, you are considered insolvent and not required to pay taxes on cancelled debt. In the case that you are solvent, you must only report savings up to the amount of your solvency. Thus, if you save $10,000 but are only $4000 solvent, the IRS does not tax $6000 of your savings. This exception means that most, if not all, individuals in debt negotiation programs never pay taxes on the money they save.
In conclusion, worrying about paying taxes on cancelled debt should be the least of your worries. The most important issue is to eliminate your high-interest credit card debt and avoid filing bankruptcy. For more information, contact a professional tax advisor or a Debt Settlement expert.
Scott Wallitsch is a certified IAPDA debt arbitrator for DebtorSolution. He provides Debt ReliefDebt Negotiation, and Debt Consolidation advice to clients who are looking to become financially free and economically independent.
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