Debt Cancellation: A Trap for the Unwary

Many consumers are unaware that when they negotiate with a creditor for a reduction or forgiveness of debt, some or all of the reduction may be taxable as income.  Here's a link to an article that highlights this problem:  http://www.nytimes.com/2014/03/28/your-money/disabled-borrowers-trade-loan-debt-for-a-tax-bill-from-the-irs.html?_r=1   The best way to avoid this possibility is to have the creditor agree not to issue a 1099, but this option is not always available.  Even if a 1099 is issued, some or all of the tax may still be avoided (due to insolvency or other circumstances), but a consumer should consult with a CPA or tax attorney about potential tax issues before entering into a settlement that involves debt reduction or forgiveness.

By Kenneth D. Quat, Massachusetts Consumer Rights Attorney.
If you feel your rights have been violated, please contact our office. In most situations, we can provide an initial case evaluation at no charge.
Learn more at QuatLaw.com.