Positive Net Income

• Sometimes, a creditor will offer you a deal to settle your debts for less than what you owe. If you have a positive net income at the time you accept the offer, you may have to pay income taxes on the amount saved with the offer. If the savings is greater than $600 from creditors over the year, you will have to report this as income on your taxes.
  
  

Insolvency and Bankruptcy

• If you are insolvent, or involved in a bankruptcy, and are offered a reduced payoff for your credit card, you will not be required to count this as income. The Internal Revenue Service, or IRS, offers an exemption to insolvent borrowers when they can reduce their debts. There is a ceiling for the insolvent exemption from income taxes. As long as the amount of savings from consolidation, settlement or forgiveness does not generate a positive net income, the entire value of the savings may be tax-free. Any amount of savings that goes into positive net territory is tax-free under $600. Any amount over $600 will need to be recorded as income for the year.
  
  

Credit Card Interest

• Unlike student loans or home mortgages, credit card interest payments are not tax-deductible, nor may they be written off. You are responsible for your credit card payments, and the IRS does not offer any assistance or reductions to tax liability for paying this interest. If at all possible, look at ways to pay off credt card debt or transfer the debt to a lower interest rate. There is no tax benefit to paying high interest on credit card debts.
  
  

IRS Form 1099-C

• At the time of consolidation, settlement or forgiveness, the lender prepares an IRS Form 1099-C. The Form 1099-C lists the amount of savings to the IRS. The lender is not required to inform you that a Form 1099-C has been submitted. When you reduce your credit card debts, ask for a copy of the 1099-C and verify the amount shown is correct. It is much easier to have this corrected before it is time to file taxes. The Form 1099-C will show the amount of income added during the savings process. Once the Form 1099-C is submitted, it is your responsibility to prove that you are in bankruptcy or insolvent to the IRS to gain the insolvency exemption.