September 19, 2018

Tax Implications Of Getting A Credit Debt Settlement

Some creditors will reduce the total amount of debt outstanding in order for the borrower to achieve credit debt settlement sooner rather than later. The creditors may also reduce the outstanding amount so that it is easier in terms of monthly payments each month. The term for this is either cancellation of debt or debt forgiveness.

Credit Debt Settlement

Borrowers however are not always completely let of the hook as often the Internal Revenue Services will consider this unpaid portion of the money owed to be income that is worthy of tax. Should this occur the borrower may well find him or herself paying extra tax than he or she had budgeted for. Borrowers may find themselves doing the math to see if it is really worth getting this kind of relief from the creditors.

When a borrower has received any kind of forgiveness of debt he or she can expect to receive a tax form in the mail. The form will contain details pertaining to the borrower and the amount of money that has been written off by the lender. When the borrower files his or her tax returns this form must accompany the other paperwork. If the borrower fails to do this then he or she may be liable for fines and or penalties. There may be certain circumstances that will permit this to not be considered as extra income.

The Internal Revenue Services considers money owed that has been forgiven on credit cards, negotiated pay offs and short dales on real property as additional income. Any forgiveness on bank foreclosures is also considered as taxable income. In order for the forgiveness to be considered as income the amount has to be six hundred dollars or more.

Certain debts are not considered to be taxable by the Internal Revenue Services and two such examples are school loan debts and debts that are part of a bankruptcy file. In some cases certain loans on farms are exempt as well. When a borrower is already insolvent any forgiveness would not be taxed as income.

If a loan was for the purposes of repairing a primary residence or for the purposes of building such a property, then this would not qualify as taxable income. A single person can qualify for as much as two million dollars worth of forgiveness and married persons one million dollars each. The form should specify the type of debt, the amount of money owed and the reason for the forgiveness.

There are three forms that are used by the Internal Revenue Services and these are the form 982, form 1099-c and form 1099-A. The 1099A form is not the concern of the consumer as this form is completed by the lenders or collectors of the outstanding money. The lender will send the 1099-C to the consumer after the loan has been forgiven. The information on the form will be used by the borrower to inform the Internal Revenue Services. Should the borrower wish to claim exemption then he or she will complete the form 982.

This credit debt settlement is helpful as it can reduce monthly payments or write off money owed completely. It is important that people are frank about this with the IRS ans failing to do so could result in problems with the law. The best solution is to try not get into this situation in the first place.

Additional information at: http://www.ftc.gov/bcp/menus/consumer/credit/debt.shtm

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