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19. I have read on the internet that I will owe money to the IRS if I settle my debts with a Debt Settlement Program, is this true?

There is a lot of bad information about whether or not a debtor will owe money to the IRS when a settlement has been reached with the creditor. The reason why there is so much bad information distributed is because 1) people just do not know the true answer and 2) the banks, credit card, companies, and collection agencies do not benefit when a consumer settles their debt for less than the full balance so they make false and misleading statements.  The quickest answer to this question will come from a Debt Specialist that can explain a debt settlement program in full, to have a debt specialist call you, Click Here.

Only a CPA or Tax Advisor can say for certain whether or not you will owe an earned income tax to the IRS after a settlement but here is the information that they will decide from.  Publication 908 from the IRS tax manual has an insolvency exception and this is what applies to most clients of FH Financial Service.  The Insolvency Exception states a person is insolvent when, and to extent, your liabilities exceed the fair market value of your assets.  Determine your liabilities and the fair market value of your assets immediately before the cancellation of your debt to determine whether or not you are insolvent and the amount by which you are insolvent.

Exclude from your income debt cancelled when you are insolvent, but only up to the amount by which you are insolvent. However, you must use the amount excluded to reduce certain tax attributes.

Simplified: any time the “Original Creditor” or the “First Party Collection Agency” charges off the debt and reports a loss on there tax statements and then settle a debt, they are supposed to report canceled debts exceeding $600 to the IRS. You are supposed to report the same as income on your annual tax return. Many people do not know that the IRS permits you to write off any “income” from canceled debts up to the amount by which you were indebted.

What this means in English: If your debt exceeds the amount in dollars of your assets, then you have a negative net worth. Therefore, if you have a negative net worth, you will not owe money to the IRS for settling your debts with a Debt Settlement Program from FH Financial.

To read the full Publication 908, Click Here.

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Note: FH Financial does not provide tax advice, you should consult a tax advisor for advice specific to your situation.