Debt settlements are an alternative to bankruptcy that can provide peace of mind. No longer do you have to endure the continuing telephone calls, final notices and other onerous collection tactics used by harassing creditors.
Almost immediately, you experience the stress relief. However, it is important to note that while you solved a problem, you did not necessarily save any money.
Receiving a 1099-C for the previous tax year likely brings more questions than answers. The tax document is issued to taxpayers when banks cancel debts following agreements with creditors to pay lesser amounts on their bills.
The difference from the original amount to the settlement is reported on the form. If the amount remaining is $600 or more, the IRS considers it taxable income.
Unlike bankruptcies, debt settlements have tax consequences. Depending on the amount reported on the 1099-C, debt relief represents only a temporary respite. Instead of owing a credit card company, you are now in debt to the largest, most powerful collection agency in the country.
In addition to debt settlements, a 1099-C is also issued under the following circumstances:
- Non-payment of a debt for at least three years combined with no collection activity over the past year
- Forgiveness or nonpayment of a foreclosure deficiency, specifically the difference owed based on the value of the home
- A home sold in a short sale where the lender agrees to pay less than was due
Pursuing relief from debts through negotiations or bankruptcy filings has numerous benefits. However, they also have certain consequences. An attorney experienced in both bankruptcy and tax law can be your best asset and advocate.