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What are the tax implications of debt settlement?

Debt settlement does have tax implications. We always try to remind our clients that when we settle debt for 20 or 30 cents on a dollar, that they ultimately will receive a 1099 in the following tax year, maybe even the next couple of tax years, for the amount of the forgiveness of debt, and they would owe taxes on that as if it was income to them. One advantage with bankruptcy is that you don't have that issue. Any debt discharged in bankruptcy is not taxable, so sometimes it's good to make a comparison as to which would be the best way to go.


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