Debt Settlement May Raise Your Tax Bill
Oftentimes, clients come into my office confused about their debt relief options. They have a general idea about what bankruptcy is and how it works, yet they are bombarded daily with advertisements about settling their debts without bankruptcy. What they never hear is that settling with credit card companies or debt collectors may mean higher taxes in the long run.
Some people come into my office already enrolled in a "debt settlement" plan. Others have attempted to settle debts directly with creditors. When people settle debts with banks, collection agencies or other lenders for less than the balance due, the creditor is required to file a Form 1099-C with the IRS. The Form reports the cancellation of debt and the amount forgiven (the difference between what you owe and what you settle for) as income to the debtor.
For instance, if you owe $5,000 on a credit card, but you pay $3,000 to settle it with the creditor, that $2,000 of forgiven debt must be reported as income on your tax return. The result will mean either you will owe more taxes or a get a smaller refund. Not surprisingly, debt settlement companies and creditors do not tell their customers about these implications.
And while some debtors may feel better about settling the debts without filing for bankruptcy, they need to understand that there are real tax implications for doing so. So how is bankruptcy different? Debt that is discharged in a bankruptcy is not subject to taxation as forgiven debt. This is because technically the debt is not forgiven, your creditors are just prohibited from collecting on it.
In the end, many people may find that they've traded in a bad creditor for the worst creditor of them all, the IRS. It's important to speak with an experienced bankruptcy attorney about whether or not filing bankruptcy is your best option.
Filing bankruptcy can be complicated and confusing. For more information on Chapter 7 and Chapter 13, or for a free consultation, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.