Shed Debt And Owe Tax


Can you eliminate debt by settling with a creditor to pay less than you owed and still come out on the short end? It is possible, based on potential tax liabilities. Not only that, but “…any time an account is settled for less than you originally owe, it’s going to hurt your credit scores,” cautions Rod Griffin, Director of Public Education for Experian. “The term ‘settled’ in the credit world is not a good thing, it means you didn’t fulfill the contractual terms.”

Even so, Griffin points out that there may be certain cases in which debt settlement is in fact the right thing to do. “You just need to understand exactly what you are doing,” he concludes.

How would settling a debt land you a tax bill? Let’s assume you settled a credit card debt for $2,000 less than you owed. From the perspective of the IRS, that is no different from someone giving you $2,000 or you earning $2,000 to pay off that debt. Even though you did not earn it, in most cases that debt forgiv…

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