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Dealing with credit card debt in Washington, D.C.

While having credit card debt forgiven can be a good thing, it could also come with unexpected tax consequences. The IRS considers any debt cancellation or forgiveness in an amount of at least $600 to be taxable income. This amount must be accounted for as other income on line 21 of Form 1040. The debtor will be told how much of the forgiveness is considered taxable income when they receive Form 1099-C from the creditor.

A copy of the Form 1099-C will also be sent to the IRS, which means that it will know about the cancelled debt. Many people unfortunately throw out the form because they don't know what it is or that they owe taxes on the forgiven debt. Depending on the amount of forgiven debt, it could result in a higher tax bill if not handled properly.

Fortunately, there are some exceptions to this rule. First, if an individual is insolvent at the time that the debt is forgiven, some or all of the forgiven debt may not be considered taxable income. Debts that are discharged through bankruptcy are also not subject to this rule.

Bankruptcy may be a powerful tool for those looking to get out of consumer debt. However, it is important to be aware of any tax consequences of having credit card debt forgiven. A bankruptcy attorney may be able to advise an individual as to the tax consequences of debt relief and how bankruptcy may help eliminate debt without also triggering a surprise taxable event. The attorney can also explain the counseling and other requirements associated with a personal bankruptcy filing.

Source: Creditcards.com, "1099-C surprise: IRS tax follows canceled debt", Connie Prater, November 04, 2014

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