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If you use a debt settlement program are there any tax implications?

Yes, debt settlement saves you money by reducing your balance on your credit card debt but as a result, the IRS requests that you pay income tax on the amount you saved by using a debt settlement program. In their obscure view of the world, that amount you didn’t have to pay back is income to you and so they tax it.

For instance, if you owe $10,000 on a credit card and a debt settlement company is able to negotiate that debt down to $6,000, then the IRS says you owe taxes on the $4,000 that you saved. Therefore, you should calculate this into your payment plan and into your thought process as you determine the best way for you to get out of debt.

This is another reason why some people with lower debt amounts, say $10,000, might not opt for debt settlement as a solution. Once you pay the debt settlement company fees and the taxes, you may not find your savings enough to justify the process and the damage to your credit. However, for people with larger debt amounts who really need help, taxes are a consideration but often not as impactful on your overall decision.