If you’re weighing your options between bankruptcy and debt settlement, it’s essential to understand the financial consequences of each. One significant advantage of bankruptcy is that it spares you from receiving a 1099 for discharged debt—a crucial point that could save you a lot of money and stress.
Beware of the 1099 in Debt Settlement
Debt settlement involves negotiating with debt collectors to pay a portion of what you owe. Often, debt collectors accept 40–60% of the original debt amount because they purchased the debt for a fraction of its value—as little as 3–5% of the balance.
Here’s an example:
- You owe $2,000 to a credit card company.
- A debt collector buys that debt for $60.
- The debt collector agrees to settle with you for $1,000.
From their perspective, they’ve made a significant profit. And for you, saving $1,000 off the $2,000 debt might seem like a win—until the IRS gets involved.
When you settle a debt for less than the full amount owed, the forgiven portion (in this case, $1,000) is considered taxable income by the IRS. Debt collectors will send you a 1099 form for the forgiven amount, and you’ll likely owe taxes on it. That’s why debt collectors often ask for your Social Security number during negotiations—so they can report the forgiven amount to the IRS.
Bankruptcy: The 1099-Free Solution
Bankruptcy works differently. When you file for bankruptcy, the court issues an order discharging your debts. Once discharged, creditors cannot collect on those debts—and here’s the best part: a special tax law ensures that you do not owe taxes on debt discharged in bankruptcy. There’s no 1099, no extra income to report, and no surprise tax bill.
Still Deciding? Let Us Help You Choose the Right Path
Not sure whether bankruptcy or debt settlement is the better choice for your situation? We’re here to help. At Walker & Walker, we offer a free attorney consultation to explain your options and determine the best course of action for your financial health. And if you decide to file for bankruptcy, we can:
- File your case with no money upfront.
- Set up an affordable payment plan of just $89 every two weeks.
Don’t let financial stress weigh you down. Call us today at 612-824-4357 to schedule your free consultation. We’ll help you take the first step toward a brighter financial future.
