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.
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