In a word — IT DEPENDS!
Before you settle a loan for less than the amount you owe, make sure you consider the tax implications. It is always a good idea to get advice from your tax professional before you do anything!
(I am not a CPA and am NOT giving tax advice. Always, always speak to a professional before you make any decisions!)
Generally speaking, however, the IRS requires that your report anything over $600 in forgiven debt as taxable income. The lender will provide you with a 1099 for the debt and interest owed.
That being said, if you have more debt that you have assets, you are considered insolvent. In this case, you are NOT required to report the forgiven debt. If you have a negative net worth, then your CPA will need to prepare a personal balance sheet and file this with your tax return. There are some exceptions, and certain types of assets may not count in your net worth, so be sure you talk to your CPA!
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I just want to say reading this blog really hit close to home for me because I am a single mother and I was in so much debt that I was recently very very close to filing for bankruptcy. I had over $30,000 in credit card debt and I was miserable. I finally decided to get my life in order so I did some research on debt settlement companies…and guys before you do that I HIGHLY recommend doing the research because they are not all legit or at least don’t all do what they promise to do. However I did find one called Alpha Debt Settlement. They were great and gave me a free consultation and talked to my creditors and literally cut my debts in half. I know how it feels to always be ducking phone calls and not even bothering to open half your mail. I would HIGHLY recommend them if you are in serious debt and want to take control of your life. Just go to http://www.ALPHAsettle.com. Let me know I’d love to hear updates!
Debbie,
Thanks so much for sharing your positive experience! I don't have personal experience with debt settlement companies, so it is great to hear that you had a good experience and are on your way to financial health! Good for you for taking control and good luck to you and your children!
Wendy
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