What does “debt forgiveness” actually mean?
Debt forgiveness is not the same thing as a bankruptcy discharge, where the court permanently excuses payment and then orders creditors to refrain from ever trying to collect. It is an action by the court. “Debt forgiveness” is an action by a creditor. This means the creditor voluntarily decides not to seek payment from the debtor. There can be negative tax consequences from “debt forgiveness.” Many creditors actually report forgiven debt as income to the IRS, and send Form 1099 to the person whose debt has been forgiven. Many individuals are required to pay income taxes on the amount of the forgiven debt. A bankruptcy filing can often help individuals avoid having to recognize this “phantom income.” Warning: this is not tax advice. If you have a problem in this area, you are strongly encouraged to consult with an accountant or an attorney!!!!!
