I understand that there may be tax liabilities on a Debt Settlement if you’re not Insolvent at the time. I know you’re not a Tax Man, but can you help me see if my assumptions are correct?
$50,000 of Debt increases to $55,000 by settlement
Settle at 40% = $22,000
Forgiven Debt Income = $33,000
Wife and I make $49,000 combined
$33,000 plus $49,000 = $82,000 total income
That would move us up to the 25% tax bracket so
25% taxes on the $33,000 Forgiven Debt = $8,250
That’s a lot to be added back into the settlement benefit. If this is close to being right, I think I’m gonna need to work at my negotiation skills to get better settlements!
If you are not insolvent at the time you start the settlement, the math appears to be correct.
It is my understanding the tax liability is only on that part of the debt above the point where you become insolvent.
So if you are currently insolvent and would be up until the point you settle fifty percent of the outstanding debt for example, then you’d only owe income tax on $16,500 of the forgiven debt above the point where you became solvent.
This is not a matter of being a better negotiator but using the right debt relief tool at the right time. It’s one of the reasons that bankruptcy makes so much sense for so many people. None of the forgiven debt is taxable.
Do you have $22,000 cash on hand to settle with? If not, where are you planning to get the funds?
Please post your responses and follow-up messages to me on this in the comments section below.