You settled a debt for less than you owed. Here's what to expect when you file your taxes.
CBS News · Angelica Leicht ·
Settling your debt can offer financial relief, but it may also create unexpected tax obligations.
Getting a creditor to accept less than what you owe can feel like a major financial victory, especially if you've spent months or years struggling with expensive debt that you can't afford to pay. Rather than continuing to make payments on high interest charges and a balance that won't budge, you've negotiated a way to put that obligation behind you for good. And depending on how much of the debt was forgiven, the savings can be substantial.
And, there are a lot of borrowers dealing with mounting financial pressure in today's high-rate, inflationary environment, so that kind of relief may be particularly appealing right now. Case in point? A recent survey from Freedom Debt Relief found that 20% of respondents carrying at least $10,000 in unsecured debt were behind on at least one account. The same survey found that 52% viewed debt settlement as a safe strategy for addressing their balances.
But while settling a debt can help you eliminate a significant debt, the agreement you make with your creditor isn't necessarily the end of the process. There's another potential consequence that's easy to overlook and it could be important when it's time to file taxes.
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