If You Make A Reduced Settlement With A Credit Card Is The Difference Reported To The IRS As Income?

Settling Debt To Save Money

In debt settlement the object is to take the bills you currently owe on and renegotiate them down to a lower amount you can afford to pay.  It is common practice in the credit industry.  The benefit of course to the debtor is easy to see: savings.  On average a properly negotiated debt settlement can yield a savings over the original amount owed of up to 40% or even more.  Once better, the settlement can be made to show up on your credit report as paid in full, if you can get them to agree to it.  A win-win situation for the consumer. 

Additionally the lender benefits in their own way.  While it is a loss considering the new amount against the money they had owed to them, the original debt, it can be viewed in the eyes of the company’s bottom line as a win.  Why is this?  Simple.  If they were to let you forfeit completely and pay nothing on the higher amount they would be out more money.  When a borrowed amount of money goes delinquent, it’s always a lose or lose worse situation for the creditor. 

Certainly they can sell off the troubled account to a collection company who will then pursue you for the amount owed.  However, these collection agencies only pay pennies on the dollar of the amount owed originally.  So in a sense the company takes a small loss on your account to prevent a much larger one.

How Much Are You Saving

While it may seem odd to think that money you go out and negotiate to a savings can be considered income by the IRS (Internal Revenue System) it can be.  The IRS has determined this money to be income because essentially in a way it is.  While it’s not a check in the mail addressed to you, it is taking a bite out of an amount you already got to spend with your creditors lent money. 

So they have a point.  The key to debt settlement in regards to the IRS is how much you saved.  Any negotiated debt settlement that yields you more than $600.00 off what you owed must be reported to the IRS or you can face fines or.  If this applies to you, simply request IRS tax form 1099-C and include the information when you next file your taxes.

Related posts:

1. What Is The Difference Between Debt Settlement And Debt Consolidation?
2. What Is The Difference Between Debt Consolidation And Debt Settlement?
3. How Will Debt Settlement Affect My Credit Report?
4. How Bad Is Debt Settlement On Your Credit Report? How Many Points?
5. How To Begin A Credit Card Debt Settlement