Escape the Debt Forgiveness Tax Trap
For this blog post, I’m happy to have Patricia Briggs as a guest blogger for you:
There is no doubt that bankruptcy must always be the last resort. Before filing a bankruptcy, you should try every option available. It may be either credit counseling or debt settlement programs. You can also go for a debt consolidation through a home equity loan or ask your creditors for a reduced payment plan or a discounted lump sum payment. In this article, we will discuss about the last method as it has some pitfalls.
Often, lenders agree to compromise the balance if it is paid in one lump sum payment. However, troubles arise when they compromise more than $600 on the bill. If done so, the bank has to file form 1099C with the Internal Revenue Services (IRS) declaring that discount as an income. Now, you have to pay tax on that money, as IRS will consider it as taxable income. The IRS has a very instructive publication on this issue. However, there are always exceptions. In this case, there are the following:
