Taxes on Settled Debt?

Over $600 will be taxed as though you earned it.
In other words, if you had a $10,000 debt, and were able to settle it for $4,000, you would be adding $6,000 to your income when the tax man cometh.

If you file bankruptcy or can otherwise prove to the IRS that you are insolvent, then this can be waived.

Lisa, here's a good discussion on this topic. All the points are covered.

http://www.debtconsolidationcare.com/collection-agencies/1099C-questions.html

This actually happened to me. I was taxed on a loan that I defaulted on (it wasn't forgiven). It took two years to be taxed, though.

Anyone know how I would prove I was insolvent? I think we pretty much are. I guess I should use a tax professional in the year we get the 1099s?

I think the only way you could do this for the IRS is to fill out a Form 433-F which is a financial statement. This is where you list all of your income sources and all of your expenses. Along with listing your expenses for housing, etc, the IRS also gives you a set amount for food, etc, depending on the size of your family.

I found the proper form to be using for this on another post. It's printed off and ready to use in the year this is 1099'ed. If we do it. We are still considering.

I have researched this issue as I'm hoping to do some debt settlements. The rule says that if your debts exceed your assets at the time of settlement you are insolvent. Call the IRS and speak to one of their representatives. Otherwise, if you have assets of $50,000 including the equity on your home, car and etc. and your debts are $75,000 - you are exempt for the first $25,000. That is how I understand it so far, I have asked the IRS if 401k counts in the assets and they are suppose to let me know. 401k is exempt from bankruptcy assets so I'm thinking it will be the same here because it cannot be liquidated unless you quit your job are going to lose your home.