Credit card debt settled for less than full balance - tax implications?

Wait so does this mean OP will have to pay income tax on that $5,300? That seems really unfair considering they were in financial hardship to begin with. Are there any exceptions to this rule?

Yes, they would typically need to report that $5,300 as income on their tax return and pay tax on it. However, there are some important exceptions that might apply. The most common exception is the insolvency exclusion. If you were "insolvent" immediately before the debt was canceled, you might not have to include some or all of the canceled debt as income. Insolvency means your total debts exceeded the fair market value of your total assets. There's a worksheet (Form 982) to help calculate this. You'd need to add up all your assets and debts right before the settlement to determine if you qualify.

How accurate was this service? I settled some medical debt recently and am worried about getting hit with a surprise tax bill. Does it actually take into account all the possible exemptions?

I'm skeptical - do they just spit out generic advice or is it actually personalized to your situation? And do they help you fill out that insolvency worksheet thing the other commenter mentioned?

The service provided highly accurate guidance that was specific to my situation. It analyzed my 1099-C and identified that I qualified for the insolvency exclusion based on my financial situation right before the debt cancellation. Yes, it absolutely helps with the insolvency worksheet! It walked me through exactly what assets and liabilities to include, which was super helpful because I was confused about whether to count certain things. It even generates a completed Form 982 that you can use with your tax return. It definitely wasn't generic advice - it was tailored to my specific numbers and situation.

How does this even work? I thought it was impossible to get through to the IRS these days. Are you saying this service somehow jumps the queue? That sounds too good to be true.

Yeah right... sounds like a scam to me. The IRS doesn't let anyone "cut in line" and I doubt they'd give specific tax advice about insolvency over the phone anyway. Did they charge you for this magical service?

It doesn't jump the queue or do anything improper. They use technology to automatically dial and navigate the IRS phone system, which can be incredibly confusing and time-consuming. They keep trying different options and times of day until they reach a point in the queue where you're likely to get through, then they call you to connect. It's essentially doing what you would do if you had unlimited time to keep calling back. The IRS agents absolutely do provide guidance on tax matters - that's literally their job. The agent I spoke with walked me through which sections of Form 982 applied to my situation and explained how to document my insolvency properly. They won't do your taxes for you, but they will clarify filing requirements, which was exactly what I needed.

Thanks for bringing that up. Unfortunately my credit is already trashed from falling behind on payments before the settlement. How long did it take for your score to recover after the settlement was completed?

My score started recovering after about a year of on-time payments on my remaining accounts. The settled accounts showed as "settled for less than full amount" on my credit report, which isn't great, but much better than having active delinquent accounts. I saw about a 50 point increase after that first year, then another 70-80 points over the next year as the negative impact started to diminish. Opening a secured credit card and using it responsibly also helped rebuild my score faster. It's a slow process but definitely recoverable!

This is true but definitely keep documentation of all your assets and liabilities at the time the debt was forgiven! When I went through this, I created a spreadsheet with everything I owned (car, bank accounts, etc) and everything I owed (other credit cards, student loans, etc). I had to use it when filling out Form 982 and I kept it in case of audit.