Thursday, January 7th, 2010

do you have to pay taxes for debt you got wiped out with debt negotiation?

Debt Negotiation
Laura P asked:


i read that if you saved more than $800, or something like that, with debt negotiation, that it gets reported to the IRS and youre liable for paying taxes on it. is this true? if it is, whats the benefit, then, of doing the negotiation if youre going to have to pay 30%, or so, on taxes? i dont get it…

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3 Responses to “do you have to pay taxes for debt you got wiped out with debt negotiation?”

Bill Says:
January 8th, 2010 at 5:36 pm

Yes, because they’ve basically given you that money. They get to write off the bad debt on their taxes, but you got it as income.

So you lose a percentage of the savings…I’d much rather pay the tax on $10K than pay $10K for instance.

STEVEN F Says:
January 12th, 2010 at 12:37 am

The creditor must report any amount above $600. You must report any amount above $0. There is no special tax rate. It is treated as regular income.

mattapan26 Says:
January 12th, 2010 at 3:35 pm

As the other answers have noted, the general rule is that income from cancellation of indebtedness is included in income. There are exceptions, for instance, if you were still insolvent after the debt was forgiven, if you were in bankruptcy when the debt was released, among others. See Section 108 of the Internal Revenue Code.

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