It is that time of year - resolution time. Everyone is making promises to make themselves better; lose weight, exercise, quit smoking, get out of debt... And all over the TV are companies who are promising to help you meet your goals, for a fee. They want to sell you equipment, special programs, food and services to make your goal a reality. Buyer Beware!
Over the last few days, I have seen several companies which promise to help you with credit card debt. They promise to help you "settle" with the card companies. These companies have been around for a while. Generally, they negotiate with the card company for reduced interest rates and a more forgiving pay back schedule for you. Each company is different and it's up to you to do your research into the company and their program. The last few days I have hear the word "settle" much more often (or it's being pushed more.) It is the word "settle" that is the reason for this post. To me, "settle" seems to be implying a end of the problem (the debt). A forgiveness of the debt. If you owe on a credit card and the card company agrees to forgive that debt, so you don't pay them back all or a part of what your owe them, you will generally owe taxes on the money they forgive. The card company/debt negotiator may not warn you about this. Too often, I have had clients who received this surprise in the mail and they don't know what it is. Often it is sent with all the papers they receive documenting the debt forgiveness, and they file it with that paperwork.
1099C Cancellation of Debt is the form this surprise takes. It can be issued not just for credit card debt but foreclosures in general. I am sure there are taxpayers who have seen this form for a home they could no longer afford. The bottom line is that if a lender forgives you a debt you can be taxed on the amount of the debt. Why, because it could be a deductible expenses for them and if they deduct it someone has to be taxed for it. So, for the taxpayer, it is income. It is taxed in the year the debt is forgiven. You should receive a 1099C but like I mentioned earlier it could come with all the documents to close the debt. You many need to look for it. Since the lender has issued a 1099C, this income will show on the IRS matching program. If you miss it in the year it is issued, it will catch up with you later with penalties and interest.
If a lender, be it credit card company, bank, credit union, etc., forgives a debt you owe them, you have to understand that there may be tax consequences and prepare for them. Talk to your tax professional.