Tax Implications of Debt Settlement

How Debt Settlement Works

A debt settlement company acts as a middleman to help you negotiate your debt. The first thing that a debt settlement company will likely instruct you to do is to stop paying your credit cards. The debt settlement company will then contact the creditor and negotiate a settlement for your outstanding balance. Many will try to tell you they can settle for half of your outstanding balances or sometimes even less. The debt settlement company will make an offer of settlement to your creditor/s directly.

The Problem with Debt Settlement

The problem with debt settlement is that creditors do not have to accept a debt settlement company’s offer of settlement. If they don’t accept it they can then move forward with further legal action to collect on the debt. Perhaps the bigger issue for the debtor is that if they do accept the offer of settlement there are tax implications. The creditor will send the debtor a 1099 and in essence the amount by which the balance was reduced will be treated as income-and taxed as such.

Contact Dailey Law Offices today for a free consult with an experienced bankrupty lawyer to discuss the pros and cons of settling your debt versus filing for bankruptcy.


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