By Ullian Associates of The Law Firm of Ullian & Associates, P.C. on June 11, 2015
We always discuss alternatives to bankruptcy with our clients because it is an important financial decision and you should be well informed of your options. You likely have heard the advertisements for debt consolidation companies who say they will settle your debt for pennies on the dollar. However, there can be tax consequences to any settlements. Every time a creditor settles a debt, they can issue a 1099-C tax form at the end of the year to the borrower. For example, if you owed Visa $25,000 and you settled the debt with them for $5,000, you would received a 1099-C from Visa the following January for $20,000. Since Visa eliminated $20,000 of debt, this is considered taxable income. That $20,000 forgiveness of debt will be treated like income for tax purposes and you will owe income tax on it. In bankruptcy there are no tax consequences from the credit card debt being discharged. It is important to ask questions of your attorney and understand these big financial decisions.
For more information on bankruptcy or to schedule your free consultation with The Law Firm of Ullian & Associates, P.C., contact us here.