Debt settlement is a way to seek assistance when a person can not manage or make payments on their debt.
Though this exists as a useful option for many people struggling financially, it is also a potentially complex matter, and it is important to understand as much about it as possible before diving in.
How debt forgiveness works
The New York Federal Reserve states that consumer debt reached $14.56 trillion at the end of 2020. While more people have attempted to get out of their debt through debt settlement, this does not necessarily mean that more people understand how it works.
Debt settlement works when debt forgiveness attorneys negotiate the debts of a consumer with the collection agency or the original lenders that they borrowed from. Though the lenders do not have to accept the proposals, many will, because it gives the individuals a better chance at paying off the debt.
What forgiven debts are tax exempted?
Depending on the amount of debt canceled, the IRS will not step in and tax it. However, if the amount of debt cancelled is significant – over $600 – then the IRS will likely tax the forgivable amount.
Creditors must submit a 1099-C form which declares the total debt cancelled. A final copy of the form gets sent out after final payments come in.
However, some cancelled debts hold exemption from taxation. Debts cancelled as a gift or via inheritance, certain cancelled student loans, reductions under the Home Affordable Modification Program and some credits provided by buyers of property may count.
It is important to get in contact with legal help to decide which option suits best.