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The impact of debt relief on taxes

Many Tennessee residents are in need of debt relief. Some have spent years relying on credit cards to make ends meet. Others may have crippling medical debt or student loan debt that makes it difficult for them to meet their other financial needs. In other cases, a job loss may prevent people from being able to pay their bills. No matter what is causing a person financial distress, debt relief options can prove very useful.

These debt relief options can give people the financial fresh start that they need in order to move forward from a difficult period in their lives. They can also help to stop embarrassing creditor harassment from occurring.

However, debt relief does not occur without consequences. One consequence is that debt relief can effect a person's tax liability. According to the Internal Revenue Service, the cancellation of debt may result in a taxable event.

The cancellation of debt occurs when people receive debt forgiveness for money that they have borrowed from a commercial lender. This can often be a problem in cases of a foreclosure, but can affect any debt forgiveness. Any amount that is forgiven may be treated as taxable income. If the IRS considers it income, a person could owe significant taxes as a result of the forgiveness. This can be a problem for people who are already struggling financially.

However, there are exceptions to the cancellation of debt rule. In bankruptcy, for example, the debt that is forgiven is not considered taxable income. Additionally, in certain situations where a person is insolvent, debt forgiveness may not result in a taxable event.

Tennessee residents need to understand when debt relief may result in a taxable event. By getting the right information, people can work to maximize their debt relief and minimize their tax obligations.

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Kenneth C. Rannick, P.C.
4416 Brainerd Road
Chattanooga, TN 37411

Phone: 423-954-7180
Phone: 423-624-4002
Fax: 423-624-0509
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