I found this interesting article on the Nolo.com website. Has anyone had an experience with this? Beware of the IRS If Your Creditor Writes Off or Settles a Debt The IRS may count a debt written off or settled by your creditor as income to you. An IRS law could cost you money if you settle a debt with a creditor for less than the full amount. Likewise, this rule could shrink your wallet if a creditor writes off a debt you owe -- that is, ceases collection efforts, declares the debt uncollectible, and reports it as a tax loss to the IRS. (26 U.S.C. § 108.) This is because you must report forgiven debt as income, with certain important exceptions. Debts subject to this law include money owed after foreclosure or property repossession or a credit card bill you don't pay. IRS Reporting What percentage of my wages can creditors take? Any financial institution that forgives or writes off $600 or more of a debt's principal (the amount not attributable to interest or fees) must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for the report of income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income. Even if you don't get a Form 1099-C from a creditor, the creditor may very well have submitted one to the IRS. If you haven't listed the income on your tax return and the creditor has provided the information to the IRS, you could get a tax bill or, worse, an audit notice. This could end up costing you more (in IRS interest and penalties) in the long run. (more to this story) http://nolo.com/article.cfm/pg/1/ob...0-172E-4CFD-94C67EF8DD1E31BA/213/208/212/ART/
Yes. Lots of threads on the board discuss it. Some people have attempted to include the tax liability issue in their settlement agreements with mixed results.
