Oftentimes, clients come into my office confused about their options. They have a general idea about what bankruptcy is and how it works, yet they are bombarded daily with advertisements about settling their debts without bankruptcy. What they never hear is that settlilng with credit card companies may mean higher taxes in the long run.
When banks, collection agencies or other lenders settle debts for less than the balance due, they are required to file a Form 1099-C with the IRS. The Form reports the cancellation of debt and the amount forgiven (the difference between what you owe and what you settle for) is considered income to the debtor.
While some debtors may feel better about settling the debts without filing for bankruptcy, they need to understand that there are real tax implications for doing so. So how is bankruptcy different? Debt that is discharged in a bankruptcy is not subject to taxation as forgiven debt. This is because technically the debt is not forgiven, your creditors are just prohibited from collecting on it.
In the end, many people may find that they've traded in a bad creditor for the worst creditor of them all, the IRS. It's important to speak with an experienced bankruptcy attorney about whether or not filing bankruptcy is your best option.
Filing bankruptcy can be complicated and confusing. For more information on Chapter 7 and Chapter 13, or for a free consultation, call me at 330-605-3508 or visit my website at http://www.ohiobankruptcyrelief.com/.
