I often reach credit card debt settlements and student loan debt settlements for my clients that result in saving them tens of thousands of dollars.  While it’s a huge relief to settle your debts, the money you save in the debt settlement is considered income.  However, there is an insolvency exception that I will explain when considering if your forgiven debt is considered income, so don’t be discouraged that you will have to pay taxes on your debt settlement just yet. 

 

What is Forgiven Debt?

Forgiven debt is any debt that you owe that is canceled.  The money saved in a debt settlement, it is considered “forgiven debt”.  A debt settlement is the process of negotiating a deal between you (the borrower) and your creditor to pay back significantly less than you originally owed on your debt.  For many years I have successfully negotiated debt settlements for credit card debt, student loan debt, small business debt, Payday loan debt and medical bill debt.   

 

Do I Have to Pay Taxes on My Forgiven Debt?

Your “forgiven debt” is the amount of money you saved in a debt settlement and is considered income.  In the year that your debt is settled, you will receive a Form 1099-C from your lender.  This is a “Cancellation of Debt” form.  This form will be issued by the lender not just for a debt settlement, but also for foreclosures, repossessions, and the return of property to a lender. However, there is an insolvency exception that might be very helpful in forgiving your debt as income.

 

What is the Insolvency Exception?

You are considered “insolvent” when your debt liabilities exceed the fair market value of your assets. The IRS defines the insolvency exception in Publication 908: “You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.” 

 

How Do I know if I Qualify for the Insolvency Exception?

I advise my clients to consult with a tax professional to see if they qualify for the insolvency exception.  Many of my clients are pleasantly surprised that they do qualify and do not have to pay taxes on their forgiven debt. 

The good news is that debt settlement fees to your debt relief attorney for the purpose of reducing your credit card debt are tax deductible.  If you have any questions about your debt relief options, give me a call at 858-217-5051 for a free debt consultation.  Or you can submit an email to me through our new “Ask a Debt Question” feature.  And be sure to check out my debt relief success story page to learn about people just like you who are now living a life free of debt.

 


Daniel R. Gamez, an attorney focusing exclusively in debt relief, is licensed to practice in all state and federal courts in California and Texas. Mr. Gamez owns and operates the Gamez Law Firm in San Diego, CA. For more information, please contact Daniel Gamez at 858-217-5051, daniel@gamezlawfirm.com or use our online contact form. Stay updated with the latest debt relief tips by following on Facebook and Twitter!