There are times when a creditor will write off its losses and stop attempting to collect from you. They may decide the balance you owe is uncollectible or perhaps you offered to settle the debt for a lesser amount in exchange for forgiving the remaining balance. Either way, you no longer have to deal with that lender pestering you and you are home free, right? What a lucky break for you! Or is it?
IRS
If a creditor forgives your debt and you have not filed bankruptcy, you probably still have a new liability to worry about. What gives? What part of “debt forgiveness” creates this problem? It turns out that although you no longer owe money to your creditor who you now potentially have a new creditor to deal with, the IRS.
Cancellation of Debt Form
When a debt is forgiven, the creditor usually informs the IRS and you will receive a 1099C form reflecting a cancellation of debt. Debt that is forgiven outside of bankruptcy is typically treated as taxable income so, at the end of the year, you may generate a new tax liability. If you had filed before this forgiveness occurred, you would not be liable to either your original creditor or the IRS. This is a big reason to file bankruptcy before your creditor has a chance to forgive your debt.
If you have questions about the bankruptcy process feel free to reach out to your Fairfield bankruptcy attorney at (707) 385-0422.