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Posted: Sat Jan 19, 2008 2:23 am Subject: Debt Settlement and the IRS

I would interested in any information from people who have settled their debts and how they dealt with the tax implications of a 1099C.

From all the reading that I am doing, if you settle with a creditor make sure you negotiate that they waive all late fees, transfer fees, overlimit fees and interest from your account before you settle. If you do not take this step, I believe that you will be taxed on those fees that you were charged. Otherwise, if I don't make a payment for six months while I'm waiting to work out a settlement, the credit card company will charge me 24.99% interest and probably $78.00 a month in late fees and over limit fees, that can add up to alot of extra money you owe before you settle. Negotiating away those fees can be a huge savings at tax time when you are figuring how insolvent you may be.

I do not think that the IRS lets you take these fees out when you are figuring your forgiven debt and the tax implications. Otherwise, if XXX Credit Card says I owe them $13,000 and $3,000 was interest and fees and they settle with me for $5,000, they are going to cut me a 1099C for $8,000 unless I negotiate the interest and fees and the IRS will make me claim the full $8,000 as income - is this correct and has anyone had experience with this?

Posted: Sat Jan 19, 2008 7:53 am Subject:

Anything waived over $600 will result in a 1099 whether it be any type of fees or interest. Even collection fees are taxable if waived. Anything that is a loss to the creditor and has be written off can be charged back on the 1099.