Is it true that there are sometimes bank morgage tax consequences to settling a debt for less than the original balance?
Yes. If you have a debt that is settled for less than the original balance, and the difference (the forgiven portion of the debt) is greater than $600.00, the creditor is supposed to send you a 1099c, which would then be reported as income. The IRS does allow you to write off any income from forgiven debts up to the amount by which you were insolvent at that time. Unless you had a positive net worth at the time that you settled an account, which, for the most part, is unlikely if you’re buried in debt, then you generally wouldn’t have to pay any taxes on the forgiven debt(s). Always consult a tax attorney or advisor for options that can be applied to your specific circumstances. Incidentally, if you do wind up owing taxes, it is because you saved money. So, keep that in perspective.
