Key information about canceled debt and taxes

Have you received a form in the mail that says you owe money for a forgiven debt and don’t understand why?  Here is everything you need to know about canceled debt and taxes. Plus, we help you to manage a multiple debt situation.


Consumers who have had part or all of a debt forgiven live through this situation all the time. The reality is, canceled debt may help you regain control of your finances, but the IRS still wants its share of this income you received.

To understand the tax ramifications of canceled debt, it helps to know how this works. Whether you have a credit card debt, a mortgage to pay, or a car loan, this debt can become canceled in a variety of ways.

But after reaching a payment settlement or short sale, for example, debt just doesn’t go away. The debt that isn’t paid back, becomes income to the consumer and the government rectifies this situation by charging taxes on forgiven amounts.

Creditors and debt collectors that accept at least $600 less than the amount you owe them are required by law to file 1099-C forms and send consumers a copy to use when they file their taxes. But, consumers don't always know they are required to pay income taxes on the forgiven debt. So, imagine their surprise when they receive a 1099-C in the mail that could lead to a larger tax bill.

The IRS offers several exceptions to the rule, so if you want to know if you qualify for an exception, you may want to speak with a tax professional who can look at the details of your unique tax situation.


The most dangerous part of debts is the interests that they carry. Some can be so high that the total amount that you end up paying is an extra 25% of your purchase’s actual value. 

The interest depends on the loan; for example, credit cards usually carry much higher interest than mortgages or car loans. In order to successfully get rid of your debts, you could start paying these off according to their interest rates.

The longer you need to pay off a debt, the more interest it’ll accumulate. In the long run, you’ll spend much more than you’d expected to. This is why you need to start with your credit card when paying off your debts.

Another way to tackle debts is by using the Snowball method. While you continue with your regular payments, you should make a list of your debts from smallest to largest, without taking the interest rates into consideration. After you’ve made minimum payments on all your debts, except the smallest, pay as much as you can on this last one. Repeat and pay off each debt!

Always try to be on time on all payments. This will help you pay off your debt in a shorter amount of time and save a lot of money on interest. It can also help you form a stricter budget and stick to it.

Lastly, keep in mind that your debts affect your credit score! If you miss any payments it’ll also be reflected on it. Working to get a higher credit score will pay off when you need to take more loans, and you aren’t given awful interest rates.

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