One of the things that I talk about during initial consultations with potential clients are alternatives to bankruptcy. The biggest one, of course, is debt settlement. Debt settlement is where the lender agrees to accept a smaller amount than what’s owed to satisfy a debt. For someone struggling to figure out how to take care of their debt, settling for less sounds like a great idea.
Unfortunately, there are hidden costs to debt settlement. A recent article in the New York Times highlights that cost. The article profiles a gentleman who suffered a series of setbacks, including the loss of his wife. Shortly after she passed away, he discovered he had kidney cancer which brought about other medical problems. Unsurprisingly, the amount of medical debt he racked up in a short time was too much to bear. He filed bankruptcy but was still left with $150,000 in student loans that he had taken out for his children.
The good news was that he qualified for a disability discharge and was able to get rid of the student loans. The bad news was that the student loan lender sent him a 1099-C, showing that the debt had been forgiven. Forgiven debt is considered income and can have serious tax consequences. He expected to pay $59,000 in taxes as a result of the loan forgiveness. You can imagine the gentleman’s surprise and disappointment.
Although the tax debt may be smaller than the debt that was forgiven, there are restrictions on when taxes can be eliminated in bankruptcy. That dischargeable credit card debt or medical bills has suddenly become a weight that may not go away and only pull you down further than before. There are no tax consequences when someone files bankruptcy.
Hopefully the gentleman will talk with an experienced accountant. In certain cases, the tax consequences of forgiven debt can be eliminated or reduced.
You can read the New York Times article here.
If you have questions about the differences between debt settlement and bankruptcy, including potential tax consequences, we hope you’ll come in for a free, no-obligation consultation with an experienced Colorado bankruptcy lawyer. You can make an appointment by calling 303.331.3403 or by using our online scheduling system.