How will Debt Settlement affect my taxes?

Debt settlement is the process in which a debt is paid off to a creditor in one full payment that is less than the original amount owed. This solution is only for those people who are seriously behind on their payments. Before
considering a debt settlement offer, you should first think about how this will affect your financial situation and your taxes. Many people are not aware that taking this option can actually have an impact on their own taxes. Cancelled debt treated is treated as income for tax purposes.  If the total amount of cancelled debt is for $600 or more, the creditor will then send Form 1099-C (cancellation of debt) to the IRS and you. Whether or not you receive this form, the cancelled debt may be included in your income bracket on your taxes. There are some expectations to look forward to when settling debt.

Sometimes a creditor will forgive debt as a gift to you, which means you will not have to include the debt in your income. If you reach a deal with your creditors to pay what you can, and then they forgive or cancel the rest of it, you have some good luck. Student loan debt is sometimes waived off in the completion of employment under strict terms. An example would be a nurse whose student loan debt is forgiven after they work for two years in an inner-city clinic system. Debt that would have been deductible if you had paid it is not considered a part of your income when the debt is deleted or forgotten.

If the cancelled debt qualifies as principal residence indebtedness, it is not embraced in your income. This type of debt is a mortgage used to purchase, build, or highly improve your primary residence. If you decide to refinance your home for a higher amount of debt, the qualified indebtedness is subject to the original balance just before you refinanced. This means that you can only prohibit the amount of cancelled debt above the excess amount that you refinanced. However, this takes time and does not just happen overnight. You can also exclude cancelled debt from your income on your taxes if you were proven insolvent right before the debt was taken back. Add all of your debts together before the cancellation to determine whether you are insolvent or not. After that add the total of all your assets before the given debt was omitted. Assets include your high owned property, such as your car and your home. Getting in hot water with a creditor is one thing but getting into trouble with the IRS for improperly claiming insolvency can be like jumping into fire. In some cases this is the only option that certain people of income brackets can choose. Other people may find out that this does not help them out as much as they thought it would. Whatever you decide, make sure you research a lot and consult a tax professional to help determine the best possible outcome for your situation.