The IRS and Debt Cancellation

If you're negotiating with creditors to get forgiveness of some or all of your debt, you need to be aware that any cancelled will most likely create a tax bill for you.

When your debt is forgiven by a credit company, bank, federal agency or credit union, you will most likely receive IRS form 1099-C if the cancelled debt is more than $600. This is reported to the IRS. Even creditors not required to report these transactions often do report them.

You must report the cancelled debt on your 1040. In most cases, the IRS treats this as taxable income and may also hit you with taxes due on any interest that was forgiven.

Find out more about debt cancellation in IRS Publication 17, Your Federal Income Tax.

Negotiating a settlement with a creditor may or may not be the answer to your financial worries if it produces a tax bill you can't pay.

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