What is a debt settlement?

In my debt relief law practice, I negotiate with creditors to significantly lower the total amount of debt that you owe.  The reduced debt that my clients owe once I have negotiated with the creditor can be paid back in a lump sum or over a short-term (2-3 year) payment plan. 


What are the tax consequences of debt settlement?

The first rule in tax law seems to be that everything is considered income. You just have to figure out a way to exclude it. This holds true for debt settlement. The amount of debt you do not have to pay back, the “forgiven debt”, is considered income by the IRS. You will receive a Form 1099-C in the year that your debt is settled. That does not mean that you automatically have to include this as income in the year the debt is forgiven. The IRS has an insolvency exception that may help you exclude your forgiven debt as income.


 Insolvency Exception

Insolvency happens when your debt liabilities exceed the fair market value of your assets. The IRS explains 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.” Clear as mud? Here’s a simple solution. Call your tax professional for advice and guidance. You may be pleasantly surprised to hear that you qualify for insolvency under the Tax Code with no further tax liability. Don’t rely on the self-proclaimed experts out there that throw out the blanket statement that you WILL be taxed on the forgiven debt. That’s just not the case.


 Are Debt Settlement and Attorney Fees Deductible?

Yes!  Fees paid to a debt settlement company for the purpose of getting a reduction of consumer’s credit card debt are tax deductible.  This also applies to attorney’s fees you pay in a debt settlement.  I do recommend working with a tax professional in the years that debts are settled to ensure that the Cancellation of Debt (income) is properly accounted for and hopefully excluded as income on your tax returns.


What are the tax ramifications if I default on my Student Loan Debt?

If you default on your student loan debt, the Internal Revenue Service can take your federal and state tax refund to collect any of your defaulted student loan debt. Default occurs after 270 days of delinquency in payment. This can be quite a shock if you are depending on a tax refund to cover expenses, pay off a bill or to take a much-needed vacation.

Taxes aren’t fun to deal with. The laws are confusing to many and filling out forms manually can take a long time and you risk making errors. If you have money on the line, it’s probably worth the extra money to have a tax professional prepare your tax returns. A professional may be able to help you find deductions you didn’t realize you could take. This year, you have a few extra days to file your return. The Washington D.C. Emancipation Day holiday is being observed on April 15 instead of April 16, 2016. So Tax Day will be April 18, 2016. 

The regular tax return filing deadline is April 15. However, due to the Washington D.C. Emancipation Day holiday being observed on April 15 instead of April 16, 2016, Tax Day is on the following Monday.


Daniel R. Gamez, an attorney focusing exclusively in debt settlement, 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 visit gamezlawfirm.com. Stay updated with the latest debt relief tips by following on Facebook and Twitter!