There are a lot of ads and even expensive TV commercials about negotiating your debt. There may be some good companies available who can actually do something for you rather than just fill their coffers with your much needed money (which as a bankruptcy attorney I saw was the usual result my clients’ had experienced, sometimes for years and for large sums). There also are many inquiries by state attorney generals throughout the US claiming fraud and scams by a lot of these businesses.
Regardless, even if you can successfully negotiate your debt through a company or perhaps by your self or in the case in which the lender closes the account for various reasons (which does happen) there is another issue you will not be able to overlook–the mandatory 1099 C (the debt cancellation 1099) which you and the IRS will receive.
As there is a logic to every law debt cancellation 1099’s probably have one, although after all my years as a bankruptcy lawyer I still cannot grasp why income taxes are charged on a deficiency from a loan. Whatever the reason the point is that yes, your 1099-C will arrive after the cancellation and you will have to report everything that you did not pay AS TAXABLE INCOME. There of course are some exceptions for those who are insolvent or for which the debt was discharged in bankruptcy which relieve one from the income tax liability. (See IRS form 982). But even if you are not insolvent or did not file bankruptcy, that does not mean you are beyond the binding grasps of the monthly expenditure of all your income for your and your family’s subsistence needs. This in effect makes the tax a not so subtle garnishment of your vitally needed wages with no recourse. Don’t be surprised!
Learn more about the black holes of debt cancellation or see an attorney or tax accountant who can help you understand the pitfalls before you trip into one.
Attorney Robert Liptak
Iowa Bankruptcy Attorney