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Robin D.
Robin D., Senior Tax Advisor 4
Category: Tax
Satisfied Customers: 13116
Experience:  15years with H & R Block. Divisional leader, Instructor
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If a person consolidates their debt, is there such a thing

Customer Question

if a person consolidates their debt, is there such a thing called insurgency for the settlement of debt, so you don't have to pay taxes on the unpaid balance?
Submitted: 3 months ago.
Category: Tax
Expert:  Robin D. replied 3 months ago.


The IRS treats forgiven debts as income and expects you to pay income taxes on it. Creditors will send you a Form 1099-C for reporting cancelled debts.

Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. There are several exceptions to the taxability of cancelled debt, such as insolvency or bankruptcy.

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion.

Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

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Expert:  Robin D. replied 3 months ago.

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