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Settling a Debt May Increase Your Taxable Income In addition, the IRS considers the forgiven amount as income, which means you may need to pay taxes on it. That additional income might also push you into a higher tax bracket, resulting in a larger tax bill.

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.

The general rule is that lawsuit settlements are taxable, except in cases that involve an actual, physical injury (?observable bodily harm?) or illness that you suffered. In other words: personal injury settlements usually aren't taxable, while other types of settlements usually are.

A credit counselor works with you and the companies you owe money to. You all agree to a plan for how you will repay the money you owe. Sometimes the companies agree to a lower interest rate.

Generally, there are two different types of fee arrangements (a proportion of the amount of debt resolved or a percentage of the amount saved). Each time the debt settlement company successfully settles a debt with one of your creditors, the company can charge you only a portion of its full fee.

Settling a Debt May Increase Your Taxable Income In addition, the IRS considers the forgiven amount as income, which means you may need to pay taxes on it. That additional income might also push you into a higher tax bracket, resulting in a larger tax bill.