You Could Pay Taxes on Settled Debts

Debt settlement offers relief on one end, but it may come back to bite you on the other end. The IRS (Internal Revenue Service), the agency responsible for tax collection and tax law enforcement, requires businesses to report any cancelled debts over $600. Not only does the business report the debt cancellation to the IRS, it’s also required to send you notification of the reported cancellation. The business gets a tax break that could be funded by you.

You’re required to report cancelled debts on you income tax return. Reporting the debt increases your taxable income and could potentially put you in another tax bracket, especially if you were teetering on the edge of brackets to begin with. That means you could end up owing Uncle Sam if you didn’t have enough money withheld to cover the increased tax responsibility. If you’re getting a refund, your check would end up being less.

Debt cancellation counts whether the business forgave the entire debt or just part of the debt (like with debt settlement). It doesn’t matter whether you used a debt settlement firm or whether you negotiated the debt yourself, a cancellation is a cancellation.

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If the debt was cancelled due to a bankruptcy discharge or because you were insolvent, you won’t have to pay taxes on it. Insolvency occurs when your liabilities (debt) are more than your assets.

If you receive a 1099-C Cancellation of Debt form from one of your ex-creditors or lenders consult with your accountant or tax preparer to find out whether you’ll have to include the cancelled debt on your tax return and how the debt cancellation will affect your tax liability.

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Credit Crisis Could Bring Credit Repair Scams

The credit crisis has brought with it an increased number of companies claiming they can repair your credit. To someone stuck in a bad credit situation, these promises sound tempting, but when it comes to credit repair companies, things are never as they seem.

Credit repair organizations can’t work the magic they’d have you believe they can. Legally, they cannot do anything to help your credit that you can’t do yourself. The same credit laws prevent you from removing accurately reported information from your credit report hold true for credit repair companies. For example, if you really did file bankruptcy 3 years ago, that bankruptcy has to remain on your report for at least 4 more years, 7 years in some cases. If you didn’t file bankruptcy, then you can submit your own credit report dispute to have the entry removed for absolutely free.

Considering the Federal Trade Commission says they’ve never seen a legitimate credit repair company, it’s safe to assume all credit repair companies are a waste of time.
Credit repair companies have to follow the federal law called the Credit Repair Organizations Act. You should avoid any company that’s not following that law.

Any credit repair company you deal with has to give you a pamphlet titled “Consumer Credit File Rights Under State and Federal Law.” They’re also required to give you a copy of your contract before you’re asked to sign it. This contract has to spell out how much you have to pay, what services will be done, the date or time period for doing the services, and a statement letting you know you can cancel the contract within 3 days of signing. The company’s name and business address should be on the contract.

You don’t have to pay for any services before they’ve been done for you. If a credit repair company asks you to, look for another one.

No credit repair company should promise to remove accurate information from your credit report. Nor should they suggest you create a new identity.


A sure sign of a scam is an agency that asks you to sign away your rights under the Credit Repair Organizations Act. Credit repair companies aren’t allowed to ask you to do this and even if you do, the waiver isn’t legally binding.

If you’ve dealt with an unscrupulous credit repair agency, you can report the Federal Trade Commission (www.ftc.gov) and your state’s Attorney General.