What are the tax consequences of settling my debts?
Your creditors may provide a form 1099-C for cancelled or settled debt exceeding $600 which you are required to report to the IRS. The forgiven debt may be reported as income on your annual tax return. This does not necessarily mean that you will owe taxes on the forgiven debt. We strongly advise you to consult with your accountant and/or tax advisor. The IRS permits individuals to exclude forgiven debt from their income through an “insolvency exclusion”. The “insolvency exclusion” allows the taxpayer to write off any forgiven debts up to the amount by which they were “insolvent” at the time. Generally, if your total debt and liabilities exceeds the fair market value of all of your assets, you likely qualify for the exclusion. Again, we highly recommend that you consult with your accountant and/or tax advisor for advice on whether you qualify for the exclusion and how to file IRS Form 982.
