Worried about taxes on debt settlement? A new article in U.S. News & World Report has good news for many people looking to settle their debts. While the IRS usually counts forgiven debt as income you need to pay taxes on, there are still ways that you could save money.
National Debt Relief’s Chief Compliance and Consumer Affairs Officer, Natalia Brown, shares important insights in the article. She points out that while settling debt for less than you owe is a big win, it’s smart to think about taxes, too. “If someone settles their unsecured debt for a fraction of the original amount through a debt settlement program, that is a huge win to be celebrated on their journey out of debt,” says Brown, “but people should be aware there may be some tax implications.”
The good news? There are ways to save money on taxes. The article explains two main ways to handle taxes on forgiven debt. First, debt that’s canceled in bankruptcy isn’t taxed. Second, if you owe more in debt than the total value of everything you own—this is called insolvency —you might not have to pay taxes on forgiven debt. The article includes helpful examples of how this works and mentions that the IRS even offers a worksheet to help you figure it out.
When you settle debt, your lender will send you a form called a 1099-C that shows how much debt has been forgiven. You’ll need to report this on your taxes, but don’t worry—the article walks you through exactly what forms to use and how to fill them out. It also explains what to do if you’re partly insolvent, meaning you may only have to pay taxes on some of the forgiven debt.
“Working with a Certified Debt Specialist and considering these tax implications can help you choose the best path forward for long-term financial health when getting out of debt,” Natalia Brown adds. This highlights why it’s so important to work with professionals who understand both debt settlement and its tax impact.
Want to learn more about debt settlement taxes? Check out the full article on U.S. News & World Report. It’s packed with detailed examples, helpful worksheets, and expert advice that could help you save money on both your debt and your taxes.
