If you should ever have a debt declared uncollectible or settled for less
than the full amount, chances are you will have to pay taxes on your forgiven debt.
After a set amount of time, such as two or three years after you default
on payments, a creditor will eventually cease collection efforts and declare
the debt to be uncollectible to ease their tax burden. When debt reductions
are negotiated, any amount that is unpaid will be reported as lost income
to the IRS. If you settle a debt with a creditor for less than the full
owed amount, or if a creditor writes off a debt you owe, you will have
to report it to the IRS as taxable income. This rule applies for nearly
any type of debt write-off or forgiveness, including foreclosures and
Any financial institution or creditor that forgives or writes off $600
or more of your outstanding debt must send you and the IRS a Form 1099-C
at the end of the tax year. You will be required to include this document
with your tax return. If your debt was less than $600 and you did not
receive a 1099-C, you will still be required to indicate this write off
in your return. If you do not reveal this write off to the IRS, you could
receive a bill or a possible audit notice as a result.
You will not have to reveal this income if:
- The debt was a nonbusiness debt and was cancelled in the aftermath of Hurricane Katrina
- A student loan was forgiven because you worked in a profession and employer
- The debt was discharged during bankruptcy
- A debt write-off or cancellation is given as a gift
- The written-off debt would have been deductible if paid
- You filed for insolvency before the debt was settled or written off
Contact the Pritchard Law Firm Today
If you are struggling with debt, a
Fort Worth Bankruptcy lawyer from The Pritchard Law Firm can help you get in control of your finances
and guide you through the process of filing for bankruptcy. Having earned
a 2015 Avvo Clients’ Choice Award for our outstanding advocacy,
we can provide the results-driven representation you need to guide you
towards a financially secure future.
To find out what our 45+ years of experience can do for you, request a
free case evaluation today!