Is money saved from debt settlement taxeable?

I once settled a credit card bill for less than 1/2 of what I owed, the company charged off the rest and sent me a 1099. I just had to claim the charged off part & pay taxes on it. I guess the IRS/State looks at it like income. That is the most I've had experience with it.

Gregg, Yes it is taxable. The company will send you a 1099 and it has to be reported to IRS as income. Good Luck KYSIDE

That really kills the advantage of debt settlement. I mean if I settle for 50%, pay 10% fee for settlement services and then pay taxes on it the settled amount I am really saving very little to have my credit so bad.

Seems like a worse and worse idea.

The debt settlement company I have spoken with is trying to convince me that I will not get a 1099 and if I do their are exemptions I can file to avoid this as ordinary income. I suppose I should ask to see those forms huh?

I settled 4 cards. I got 1099 on all of them and had to report to IRS. Thats one bunch you dont mess with. KYSIDE38

When the debt is settled, the amount of money saved is shown as an income when you file taxes. If you can prove insolvent during the settlement, you won't have to pay tax on the income forgiven. The forgiven debt has to be more than $600 before the creditor can issue the 1099-C form. The link below discusses this matter very broadly.

http://www.debtconsolidationcare.com/forums/settlement-yourself.html

Go through the IRS website also for more information on this part.

http://www.irs.gov/index.html

I'd be curious what type of exemptions they are. You may want to contact another company to get a comparison of services and fees before you make such a move.

I think that is the big key is to prove that you are insolvent. Accorsing to the IRS insolvent means having more debt than assets. I think that will not be a problem for me especially since I have $150,000 in student loans on top of home loan, car loand, etc. I have basically no equity in my home or cars. If that is all that is needed I think an exemption should be pretty easy.

So, I think you will be able to show the forgiven debt more than $600 in order to get the form from the creditor? If this is the situation, everything will be according to what you have thought by now. But, I will suggest you to take advice of your tax attorney also for any other legal aspects.

What would you need to prove that you were/are insolvent?

Showing you are insolvent should be your accountants job when it comes time to file your taxes and exclude any 1099's you have received from any debt settlemnts. Chances are most are insolvent if the debt has gotten to the point of having to be settled, but everyone's situation is different.

The debt settlement companies have nothing to do with how you handle any 1099's from your creditiors, it is your responsibility to file your taxes according to your situtation.

I posted this couple days ago in tax forum short of long is if you have lot of debt and no asset or no equity in asset than you won't pay. Google "irs and publication 4681

at least this is how I understand this if I have no euity in my cards or very little, my personal asset is let say 20K and no equity in the house in fact underwater 70k so if I settle 180k debt for 30% avarage that means I pay no taxes at all on canceled 120k, here is key sentance:

"To show that you were insolvent and that you are excluding canceled debt from income to the extent you were insolvent immediately before the cancellation"

and here is part of Publication from IRS you need to get familiar with print out and give it to your accountant


How to report the insolvency exclusion. To show that you were insolvent and that you are excluding canceled debt from income to the extent you were insolvent immediately before the cancellation, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellatotion. You must also reduce your tax attributes in Part II of Form 982 as explained under Redution of Tax Attributes, later.

Example 1.
In 2007, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2007 Form 1099-C from his credit card lender showing canceled debt of $5,000 in box 2. The FMV of Greg???s total assets immediately before the cancellation was $7,000 and his total liabilities were $15,000. This means that immediately before the cancellation, Greg was insollowing to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets).Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.

Example 2.
Assume the same facts as in Example 1 except that the FMV of Greg???s total assets immediately before the cancellation was $7,000 and his total liabilities were $10,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.
Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exception or exclusion applies).