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Debt Loan Pay
Debts don’t always follow consumers indefinitely. In many cases, creditors will give up attempting to collect on a bad debt and write the debt off as a tax loss. In others, negotiations with the debtor result in a lower balance than the individual originally owed. In both scenarios, the consumer is not directly responsible for paying the full balance, but is legally responsible for paying taxes on the portion of the debt that was forgiven by the creditor.
IRS Rules Concerning Forgiven Debt and Taxes
When an individual or business uses a bad debt as a tax deduction, the government loses money. That money can be recovered by holding the individual who incurred the debt responsible. Once a debt is officially forgiven by a creditor, the IRS considers the amount to be income for the debtor and the debtor is required to claim it as such on his taxes.
Before a creditor can claim an unpaid debt as a tax deduction, it must send the debtor a 1099 form informing him of the fact that the debt was forgiven and must be reported to the IRS. The debtor is then responsible for including the forgiven amount in his yearly income when he files his taxes. The upside to this is that the creditor cannot continue to attempt to collect the debt once the debtor has claimed the forgiven debt as income.