Dena Standley | February 24, 2023
Summary: When you settle a debt for less than what you originally owed, the IRS considers this taxable income. However, you may qualify for an exemption if you filed for bankruptcy, were insolvent during the settlement, or are eligible for student loan forgiveness. You may also be exempt from being taxed on canceled debt if the debt was forgiven as a gift or fits under a business/farm exclusion. Learn what situations require that you pay taxes on forgiven debt and what to do if you receive a 1099-C.
Typically, if your debt was forgiven or canceled by a lender, the amount forgiven is taxable. However, tax exemption is possible depending on your situation and the type of debt. If you qualify, you can eliminate or reduce the tax charges.
Generally, after your creditor forgives or cancels your debt, they must report it to you and the IRS through Form 1099–C. Once you’re aware of the forgiveness, you must put the canceled debt in the income section for tax purposes—unless you qualify for tax exemption.
So, how do you know whether you qualify for tax exemption? Which form will you use to explain your situation? Today, SoloSuit will answer these and other questions regarding debt forgiveness and tax exemption. Don’t like reading? Check out this video instead:
The US tax codes require you to add any forgiven debt as an income and have it taxed because you received a particular benefit without paying for it. However, a few situations where you can get an exclusion from taxation and not be required to add it as an income are:
If you qualify for tax exemption on your forgiven debt, you must file form 982, determining the discharged indebtedness amount they can exclude from gross income.
The worst thing to do is to ignore the matter and hide it from the IRS. Whether or not you receive Form 1009–C from your lender, you must report the forgiven debt in your tax returns. Basically, put it on line 21, containing the other income category.
When you qualify for tax exemption, fill out form 982 and, if possible, include a letter explaining why you are eligible for the tax exemption (optional). If you doubt you'll do it right, look for free or affordable tax counseling and tax preparation services in your state.
Let’s use Polly's situation to help us understand.
Example: Polly had a debt of $9,800 with First Federal Bank (FFB). After failing to pay for over a year and explaining her situation, they accepted her request for debt forgiveness. Within two weeks, Polly received form 1099–C from FFB. A friend told her she qualified for tax exemption after losing everything to a hurricane and using all she had left to start a new life. Next, Polly downloaded form 982, filled it out, and attached a letter explaining why she qualified for tax exemption on the forgiven debt. The IRS accepted her explanation after she included all her assets and liabilities, and they saw that her liabilities exceeded her assets by $7,200.
Many debt collectors are willing to reach a debt settlement of less than the original amount owed. Why? Because many debt collectors purchase old debts for a small portion of the amount and try to collect in full to make a huge profit. Even settling for 50% of the debt can earn them a lot of money.
Debt settlement is a good option if you have some money but not the whole amount you owe. Besides, your taxable forgiven debt (the amount you owe minus the amount you settled to pay) will be less than if the entire debt was forgiven.
Use SoloSuit’s SoloSettle to request your creditors to settle the debt at a lower amount than you originally owe. This is a great way to start the negotiation process and avoid going to court if you’ve been sued.
That being said, make sure to file an Answer to your debt lawsuit before sending the Debt Lawsuit Settlement Letter. This will help you avoid a default judgment, which gives collectors the right to garnish your wages and seize your property.
To learn more about how to settle a debt, check out this video:
This calculator is for educational purposes only.
SoloSuit makes it easy to fight debt collectors.
You can use SoloSuit to respond to a debt lawsuit, to send letters to collectors, and even to settle a debt.
SoloSuit's Answer service is a step-by-step web-app that asks you all the necessary questions to complete your Answer. Upon completion, we'll have an attorney review your document and we'll file it for you.
>>Read the FastCompany article: Debt Lawsuits Are Complicated: This Website Makes Them Simpler To Navigate
>>Read the NPR story on SoloSuit. (We can help you in all 50 states.)
Here's a list of guides for other states.
Being sued by a different debt collector? Were making guides on how to beat each one.
You can ask your questions on the SoloSuit forum and the community will help you out. Whether you need help now are are just look for support, we're here for you.
Is your credit card company suing you? Learn how you can beat each one.
Going to Court for Credit Card Debt — Key Tips
How to Negotiate Credit Card Debts
How to Settle a Credit Card Debt Lawsuit — Ultimate Guide
Need more info on statutes of limitations? Read our 50-state guide.
Why do debt collectors block their phone numbers?
How long do debt collectors take to respond to debt validation letters?
What are the biggest debt collector companies in the US?
Is Zombie Debt Still a Problem in 2019?
If a car is repossessed, do I still owe the debt?
Is Portfolio Recovery Associates Legit?
Is There a Judgment Against Me Without my Knowledge?
Should I File Bankruptcy Before or After a Judgment?
What is a default judgment?— What do I do?
Summoned to Court for Medical Bills — What Do I Do?
What Happens If Someone Sues You and You Have No Money?
What Happens If You Never Answer Debt Collectors?
What Happens When a Debt Is Sold to a Collection Agency
What is a Stipulated Judgment?
What is the Deadline for a Defendants Answer to Avoid a Default Judgment?
Can a Judgement Creditor Take my Car?
Can I Settle a Debt After Being Served?
Can You Appeal a Default Judgement?
Do I Need a Debt Collection Defense Attorney?
Do I Need a Payday Loans Lawyer?
Do student loans go away after 7 years? — Student Loan Debt Guide
Am I Responsible for My Spouses Medical Debt?
Should I Marry Someone With Debt?
Can a Debt Collector Leave a Voicemail?
How Does Debt Assignment Work?
What Happens If a Defendant Does Not Pay a Judgment?
How Does Debt Assignment Work?
Can You Serve Someone with a Collections Lawsuit at Their Work?
How Many Times Can a Judgment be Renewed in Oklahoma?
Does Debt Consolidation Have Risks?
What Happens If You Avoid Getting Served Court Papers?
Does Student Debt Die With You?
Can Debt Collectors Call You at Work in Texas?
How Much Do You Have to Be in Debt to File for Chapter 7?
What Is the Statute of Limitations on Debt in Washington?
How Long Does a Judgment Last?
Can Private Disability Payments Be Garnished?
Can Debt Collectors Call From Local Numbers?
Does the Fair Credit Reporting Act Work in Florida?
The Truth: Should You Never Pay a Debt Collection Agency?
Should You Communicate with a Debt Collector in Writing or by Telephone?
What Happens After a Motion for Default Is Filed?
Can a Process Server Leave a Summons Taped to My Door?
Need help managing your finances? Check out these resources.
How to Make a Debt Validation Letter - The Ultimate Guide
How to Make a Motion to Compel Arbitration Without an Attorney
How to Stop Wage Garnishment — Everything You Need to Know
How to File an FDCPA Complaint Against Your Debt Collector (Ultimate Guide)
Defending Yourself in Court Against a Debt Collector
Tips on you can to file an FDCPA lawsuit against a debt collection agency
Advice on how to answer a summons for debt collection.
Effective strategies for how to get back on track after a debt lawsuit
New Hampshire Statute of Limitations on Debt
Sample Cease and Desist Letter Against Debt Collectors
The Ultimate Guide to Responding to a Debt Collection Lawsuit in Utah
West Virginia Statute of Limitations on Debt
What debt collectors cannot do — FDCPA explained
Defending Yourself in Court Against Debt Collector
Arkansas Statute of Limitations on Debt
Youre Drowning in Debt — Heres How to Swim
Help! Im Being Sued by My Debt Collector
How to Make a Motion to Vacate Judgment
How to Answer Summons for Debt Collection in Vermont
North Dakota Statute of Limitations on Debt
ClearPoint Debt Management Review
Indiana Statute of Limitations on Debt
Oregon Eviction Laws - What They Say
CuraDebt Debt Settlement Review
How to Write a Re-Aging Debt Letter
How to Appear in Court by Phone
How to Use the Doctrine of Unclean Hands
Debt Consolidation in Eugene, Oregon
Summoned to Court for Medical Bills? What to Do Next
How to Make a Debt Settlement Agreement
Received a 3-Day Eviction Notice? Heres What to Do
How to Answer a Lawsuit for Debt Collection
Tips for Leaving the Country With Unpaid Credit Card Debt
Kansas Statute of Limitations on Debt Collection
How to File in Small Claims Court in Iowa
How to File a Civil Answer in Kings County Supreme Court
Roseland Associates Debt Consolidation Review
Do Debt Collectors Ever Give Up?
Can They Garnish Your Wages for Credit Card Debt?
How Often Do Credit Card Companies Sue for Non-Payment?
How Long Does a Judgement Last?
How Long Before a Creditor Can Garnish Wages?
How to Beat a Bill Collector in Court
Out Debt Validation Letter is the best way to respond to a collection letter. Many debt collectors will simply give up after receiving it.
"Finding yourself on the wrong side of the law unexpectedly is kinda scary. I started researching on YouTube and found SoloSuit's channel. The videos were so helpful, easy to understand and encouraging. When I reached out to SoloSuit they were on it. Very professional, impeccably prompt. Thanks for the service!" - Heather