When too much debt takes over many people seek debt relief through bankruptcy, debt negotiation or debt settlement options. The concern that people have with debt settlement or debt negotiation is whether or not they will have to pay taxes on the amount of the debt that they did not have to pay back.
According to the Internal Revenue Service any debt that is cancelled that resulted in a savings of $600 or more must be reported on a 1099. This would mean that the amount of the debt that was negotiated off could be a taxable event and have you owing money to the IRS and the government. If you happen to be in this situation, there are two reasons why this won’t affect you that much.
What Happens If I Get A 1099 After A Debt Settlement Program?
If you can show that you are financially insolvent, you will not be required to declare cancelled or settled debts as income. This is according to IRS Publication 908. You must owe more in debt than you have in assets at the time of the debt negotiation settlement with your creditor. This would also mean that you would only pay tax based on the amount of solvency you have. For example, if you save $20,000 when you only have $6000, you would only pay taxes on $6000.
The reality is that most people have more debt than they have in savings when they enter a debt negotiation program anyway. I would recommend that you speak with a tax professional first to know where you would stand prior to entering the debt settlement program. This way you would not have any surprises regarding the exception on having taxable income.
Paying Taxes On Debt Settlement Still Saves Money
So what if you have a taxable event and are issued a 1099 from your creditor. You still saved a lot of money. Do not fret the IRS will only tax you on the additional income and you will have to only pay a percentage of what you have saved and not the entire amount. If you save $10,000 in the debt negotiation process and are taxed $2000 you still saved $8000. No matter how you slice it, you still come out ok.
Will Debt Negotiation Show Up On My Credit Report?
One of the benefits about debt negotiation is that it will not show up on your credit report like a bankruptcy. If anything it only helps your credit score. When you take an unpaid collection on your credit report and settle with your creditor, you then have a paid collection on your credit. A paid collection on your credit is viewed as a positive by the credit bureaus and will have a positive effect on your credit score.
Worrying a about your credit and potential taxes when considering a debt settlement program should be low on your priority list. Your main focus should be to get the debt paid off as fast as possible so you do not have to worry about your bills anymore. Can you see it now - living life debt free?
