I received a settlement offer from Merrick Bank. On the back of the letter it mentions that the IRS requires all financial institutions to report to any cancellation or forgiveness of debt of $600 or more. It the amount is $600 or more I would receive a 1099-C in January. Does this mean I have to pay taxes on the canceled amount? Right now I do not have enough to accept their offer as is. Please advise me of the tax consequences connected to debt settlement. That will help me make my decision. Because I have to plan for what's coming next. Till have 11 cards left to settle and more that I am paying on, myself.
Ordinarily, the amount forgiven would be taxable income, BUT... there are exceptions to that rule. EXCEPTION 1: IF you are still insolvent (meaning you owe more than you own) after the forgiveness, then you do not claim it. You would attach a balance sheet to your tax return showing that as of December 13 of that year you owe more than you own (liabilities exceed assets) and you would except the income out. EXCEPTION 2: IF the amount forgiven is disputed, it is excepted out. EXCEPTION 3: IF the debt forgiveness was incidental to a bankruptcy, the income is excepted out.
