Tax Tips for Credit Card Debt Settlers
Tax season is in full swing: You only have about three weeks left to complete your tax return and get it in the mail. But if you received a big credit card settlement in the last year you may want to take some extra time getting your returns in order.
Forbes.com has a timely blog that points out some of the after-effects of debt settlement that you may not be aware.
U.S. Tax Laws require you to pay taxes on the difference between your actual debt and the amount you settled for.
Let’s say you had a credit card debt of $1,000, and entered a debt settlement agreement to pay $100 and have the debt closed. By law, you must pay taxes on the $900 difference just like if you earned it at your job.
The rules doesn’t just apply to credit card debt. If you settled for any type of debt – home mortgage, car loan, etc. – then you will be responsible for those taxes.
However, there are two situations in which you won’t have to pay for cleared debt.
If your student loans are forgiven because of your involvement in a certified government student loan forgiveness you will not owe taxes, reports Forbes.
Also, if your debts are cleared in a Chapter 7 bankruptcy case then you will not owe taxes on any of those resolved debts. The reason? Bankruptcy works differently than debt settlement. In debt settlement, you enter into a business agreement to pay a portion of your debt and have the rest written off.
Bankruptcy, on the other hand, is special legal process, and the debts resolved in your case are not considered taxable income. So if your debt is cleared with a Chapter 7, then you will not need to worry about paying massive taxes on the cleared debt.
If you have questions about the tax consequences of your chapter bankruptcy case, debt settlement or debt repayment, speak with a bankruptcy lawyer or certified accountant.
Forbes.com has a few tips