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Posted in Taxes
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Question By
Rahul1980

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How settling a credit card debt for less than owed affects the 2015 tax return?
settling credit cards for less than what i owed has messed up my tax return this year. I made about $41K in 2015 after being job less for a year. I settled my debt as much as I could. But now the forgiven debt is showing up as income in the tax return, and i owe money in federal tax. This can't be right since I hardly made about $41K and used good amount of it to pay off the debts. This is last minute but can I defer tax payment to a latter date? Also, are there any hardship allowance that I can apply for since I didn't have a job for first 4 months last year.

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Top Contributor
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I recommend you speak to a knowledeable tax agent in this instance.

The creditor reported the debt forgiveness amount. This is common. You had the benefit of the funds and didn't pay it, so  it's considered taxable income.

Reply by
Rahul1980

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I get that its a taxable income but the judgement that I got something for free is complete BS. If I had the money to pay it full, I would have. Its not like I bought a condo on beach and forgot to make the payments. And had I made enough last year, I won't be asking this question either. 

But the right answer here would have been to check if insolvency applies or not at the time of debt forgiveness. In my case it did.

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