Tax Debt Settlement: What Is It?

By: Pearle Tsuji
The new changes in the bankruptcy law are now making it harder to discharge your debts when you file for bankruptcy. Because of this, debt settlement becomes a more and more widespread technique, as many people prefer to settle their account, against payment of half of the debt. Lenders are familiar with this technique and many agree on it, forgiving the remaining balance.

This does not get you off the hook. When your debt is forgiven, you will still owe money, but not to the lending institution. If the canceled amount is larger than $600, then the lenders will send the information, further, to the IRS, and the rest of the sum is transformed into taxes. This change of the owner of your debts makes many people feel insecure about debt settlement and whether to try it or not. Still, getting off the hook with the bank counterbalances the situation pretty well.

Savings occur when such a thing happens. Just make the calculations for yourself: when you will finish paying the taxes for the debts you had at the bank, you will get to pay less then you would have done otherwise. This is not a thing that you can treat lightly! Savings are savings and paying less is always a good deal.

The insolvency rule, as presented in the Bankruptcy Tax Guide, published by the IRS, will help you on the other hand. This rule applies to you even you have not filed for bankruptcy. With the help of this rule, you will get to be among those people that are not required to pay the taxes applied for the canceled balance.

Now, to explain how things work under this circumstances. Being insolvent stand for you having a negative net worth. As you have to pay more money than you actually have, you cannot have a tax liability. Home equity is what appears in discussion now. When you do not have enough property to cover all the debts you have, then you are considered to have negative net worth, so you are insolvent and you cannot pay the taxes. So, if you get to the point where you become insolvent, you can actually take advantage of the insolvency rule.

When the taxes must be paid, make sure that you have access to professional advice on taxes. A recommended lecturing is the reduction of tax attributes, published by IRS. This publication contains information on what insolvent people have to do, like reduce rental property or loss carryovers. Even if you do not fit in any of those, read it for your own peace of mind.

The bottom line is that you are not obliged to pay the taxes for the canceled balance. This is actually a good thing for you: even if the word about how your debts are transferred to the IRS may seem scary, this is the way to get away from all the debts that got you into financial problems.

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