If a part of a debt is forgiven, is that taxable?

UPDATED: Jan 29, 2011

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If a part of a debt is forgiven, is that taxable?

I used a debt firm to save on credit cards. Now I am told that I have to pay taxes on the amount that I saved because it is considered income. Is that correct?

Asked on January 29, 2011 under Bankruptcy Law, Kansas


M.D., Member, California and New York Bar / FreeAdvice Contributing Attorney

Answered 12 years ago | Contributor

Yes it is.  Once you go for credit card settlement or settle other debts and creditors forgive a percentage of what you owe, the IRS will require you to pay taxes on this forgiven debt.  Such debt is known as cancellation-of-debt (COD) income. 

Note:  Only the unpaid balance is taxable, and then only at your normal tax rate.  

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