| If debt seems to be on your mind quite often in recent | | | | monthly payments each month. As a matter of fact, |
| months, there's a high probability that you've looked into | | | | it's highly likely that the interest paid to a creditor over a |
| your options and found that debt settlement is growing | | | | period of years would easily exceed the taxes for |
| in popularity as an alternative to bankruptcy. This is | | | | which you may be liable as a result of settling your |
| especially true since the new bankruptcy law went into | | | | debt. |
| effect back in October 2005. Debt settlement, as you | | | | There's also a good possibility that you may not be |
| may know, is a process by which creditors agree to | | | | required to pay taxes on your forgiven debt if you can |
| accept less than the full balance owed (usually around | | | | prove that you were "insolvent" at the time you settled |
| 50% or less) to settle an account. The remaining | | | | your debt(s). In order to be classified as insolvent you |
| balance is then forgiven and no further money is | | | | need to have a negative net worth. In other words, |
| owed. | | | | you would owe more money than you're actually |
| When a creditor agrees to settle an account for less | | | | worth and your liabilities would exceed your assets. |
| than the full balance, they are required by the IRS to | | | | If this is not the case and you're not classified as |
| report the canceled debt on Form 1099, if the amount | | | | insolvent at the time of any settlement of debt, then |
| of the forgiven debt is $600 or greater. The possibility | | | | obviously you may owe at least something to the IRS. |
| of tax consequences as a result of debt settlement | | | | If this is the case then it's important to speak with a |
| seems to be unsettling to many people, including some | | | | tax professional as the April 15 tax deadline nears so |
| consumers and debt counselors. When you look at the | | | | that you may get advice regarding your particular |
| larger picture, however, you'll better understand why | | | | situation. If you're not quite sure where you stand |
| the tax consequences of debt settlement shouldn't | | | | regarding the insolvency rule take a look at IRS |
| even be a major consideration. | | | | Publication 908 for additional information. |
| When individuals are required to pay taxes on the | | | | The bottom line is your bottom line. If you're in debt and |
| amount of the canceled debt it's because they saved | | | | considering debt settlement as an option, the possible |
| a significant amount of money, right? It seems that it | | | | tax consequences shouldn't play a major role in your |
| should be common sense to realize that the total | | | | decision. Your ultimate goal is to be debt-free. If you do |
| amount paid to the creditor, in addition to the taxes | | | | your homework you'll see the positive results of |
| would still be much less than what you would end up | | | | resolving your debt will likely outweigh any tax liability |
| paying if you were to continue making the minimum | | | | which you may have and your bottom line will prove it. |