Debt settlement companies and debt negotiation companies frequently promise more than they can deliver. They typically offer to settle your debts for a fraction of the balance. However, settlement of multiple large debts can be difficult to achieve, especially if one or more creditors decides to file suit. When clients get sued and face the possibility of garnishment, they discover that bankruptcy may be the best option.
Even if a debtor is successful in settling several debts, they sometimes don’t realize that the “forgiven debt” might be reported to the IRS as income on Form 1099-C. If you fail to report the income on your tax return, the IRS could send you a bill for the taxes owed.
One way to avoid the possibility of receiving an IRS Form 1099-C is to file for bankruptcy protection. Debt that is discharged in bankruptcy is not considered income, and will not trigger a new tax liability. If you are insolvent at the time a IRS Form 1099-C is filed, you should contact an attorney or tax adviser to see if there is a way to avoid the tax liability arising from forgiven debt.
Unfortunately, many debt settlement companies can’t deliver the promised results. In my practice, I have represented several individuals who contacted me after they unsuccessfully tried to get out of debt by using a debt settlement company. Most clients quickly learn that bankruptcy can provide affordable, fast relief, with much more predictable results. If you are not sure if bankruptcy is right for you, be sure to contact an attorney for an assessment of your legal options.