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While resolving your debt might appear to be a quick fix for past financial struggles, it's important to remember that while your debt is reduced, the lender still recovers part of the money. However, you must also consider the potential tax impact of settling your debt.
As we have previously discussed, it's essential to exercise caution when settling debt—many companies may ask you to default before settling, which can harm your credit score. But CreditCards.com highlights an additional concern: the forgiven portion of your debt may be taxable.
After successfully resolving credit card debt, consumers might receive 1099-C 'cancellation of debt' tax forms. Why? The U.S. Internal Revenue Service views forgiven debt as income. Creditors and debt collectors who accept at least $600 less than the full balance must file these 1099-C forms with the IRS and send a copy to the debtor. This portion of forgiven debt must be reported as 'income' on your federal tax return.
Unfortunately, many taxpayers overlook this notice. As mentioned in the article, ignoring it can lead to IRS audits and penalties. If you settle your debt and receive this form, it's advised to consult a tax preparer to determine if you're eligible for any exclusions.
Before finalizing your debt settlement, make sure to take into account the tax consequences. For more details, visit the complete article.
Image credit: J Brew.
