How Will My Taxes Be Affected by Settling a Consumer Debt?

By: Robert J. Nahoum

A man in suit and tie with his arms crossed.



You settled a credit card debt this past year and thought you were done with it forever.  Now, a tax form curiously shows up in the mail from the same creditor with whom you settled.  All too often people over look the potential tax consequences of settling their debts.

The Rule:

Depending on how a settlement is reached, the difference between what the creditor says you owe and what you settle for is considered cancelled or forgiven debt.  According to current tax code, cancelled or forgiven debt is considered taxable income.  For example, if you have a $10,000 credit card debt that you settle for $6,000, the $4,000 difference will be taxed as income.  Creditors who agree to accept at least $600 less than the original balance are required to file a tax form called a 1099-C and to notify you of the filing.  You are then required to report that portion of the forgiven debt as income on you tax returns.

As with most rules, especially those in the tax code, there are exceptions.  Exclusions to the taxability of forgiven debt include:

  • Settlements of less than $600 the original balance;
  • Debts discharged during bankruptcy;
  • Debts of consumers who are insolvent (liabilities exceed their assets);
  • Some homeowners who default on their mortgage (Mortgage Forgiveness Debt Relief Act);
  • Settled debt which has not yet been fully paid (the 1099-C should not issue until scheduled payments are complete).


If you settled a debt or are planning to settle a debt, consider what if any tax consequences there may be.  Never rely on what you’re being told by the creditor, they are not advocating for you and are not obligated to give you tax advice.  If you have a debt defense attorney, you should discuss the tax consequences with him or her but remember – the most qualified person you should consult with is your accountant, tax attorney or tax preparer.

If you need help settling or defending a debt collection law suit or stopping harassing debt collectors, contact us today to see what we can do for you.

The Law Offices of Robert J. Nahoum, P.C
(845) 232-0202