Debt Forgiveness: Taxable in Many Cases
It is important to recognize that in many cases the debt forgiveness you receive is taxable. Even though you do not actually receive any money when a debt — or part of a debt - is forgiven, the IRS taxes you like you did. However, there are some instances in which debt forgiveness is not taxable. Wade Young at Lenderama offers this exceptions to taxable debt forgiveness:
- Title 11 case.
- The extent you are insolvent just before the cancellation.
- Qualified farm debts.
- Debt connected with business real estate.
- Qualified principal residence.
- Issues related to qualified disasters in the Midwest.
However, in some cases the issue of qualification, or the extent to which you are insolvent, are in doubt. This usually means a great deal of paperwork and some expense as you hire someone qualified to take care of this business.
Debt settlement and debt forgiveness
In many cases, if you go through debt settlement, you are agreeing to debt forgiveness. Your creditors agree to accept less than you actually owe. They do this because, in some cases, you have already more than repaid (through interest) the amount originally borrowed. This means that if you pay another 20% to 60% more, the creditor still comes out ahead overall. But for you, debt settlement could mean damage to your credit score, as well as the necessity of paying income taxes on the amount of debt that was forgiven.
In some cases, it really is best for all parties to come to a settlement and move on. Depending on your situation, debt forgiveness might be the way to go. However, you will need to make sure that you weigh the costs, and consider the drawbacks. You should also be aware of the penalties you may have to pay. Consider consulting a professional before you take this step. You should always look at your options before making such a large financial decision.
