According to credit data from The Urban Institute for 2022, about one in three Americans has past-due debt. The biggest percentage of debt defaulters (16% in the case of medical debt) also default on credit card, student, and auto loans.

Consumers may benefit from debt relief, also known as debt settlement, if their debt is so big that making payments becomes unmanageable (or if paying off the balances would take an inconceivable number of years).

Debt relief firms can assist customers in reducing their debts by negotiating with a collections agency or the original lender/card issuer, albeit there are hazards involved. Over extended individuals now have the opportunity to pay off their bills for less money.

Debt settlement experts (typically attorneys) fight for their clients’ interests by persuading lenders to accept a lump-sum settlement payment that releases the borrower from all outstanding debt in exchange for a fee.

Although they are not required to, lenders frequently accept these settlement offers in an effort to reduce their losses and cover costs. Clients gain from having their debt virtually erased for a sum far lower than the initial total.

However, the IRS assesses taxes on the difference between what was owed and what was actually paid when you get a sizable portion of your debt forgiven.

Leslie H. Tayne, a lawyer for debt relief and the founder of Tayne Law Group, advises that you will be taxed on any forgiven debt that is over $600. “There are some exceptions,” she says to CNBC Select, “but even if you do end up paying taxes on [the forgiven debt], you’ll generally still be better off than if you had to pay the full sum.”

Most Canceled Debt Is Taxable

You will be taxed on any forgiven debt that exceeds $600 if you are successful in obtaining a settlement that is much less than the total amount of debt you owe.

“The creditor is required to file a 1099-C form with the IRS, which will detail the amount of your settled debt,” explains Tayne. Similar to income tax forms, the forgiving creditor will also send you a copy of the 1099-C debt forgiveness form in the tax year that the last payment is completed.

According to Tayne, “that form will give you the amount forgiven,” which is the sum that is regarded as taxable income. Your tax forms have a special line designated for this function.

The following list of exceptions and exclusions to this regulation is provided. Tayne contends that even if you do end up having to pay taxes on your debt forgiveness, “you’ll generally still be better off than if you had to pay the full amount.”

Some Canceled Debt Is Exempt

In some circumstances, debts that have been cancelled or forgiven may be removed from your taxable income. These are regarded as exclusions. Although it cannot be completely erased, other types of debt may be lessened or reduced. These debts are referred to as exclusions by the IRS.
Exceptions are taken into account before exclusions when you fill out your tax forms.
We list the types of debt forgiveness that the IRS does not deem taxable below.


The following forms of canceled debt may be excluded by taxpayers from their taxable income:

1. Bequests and gifts:

  1. Some student loans (e.g., those given to medical professionals and
    educators working in remote or low-income areas)
  2. Debt that is deductible (such as home mortgage interest that was
    deductible on Schedule A)
  3. Price reduced following purchase (e.g., debt on assets owned by solvent
    taxpayers is reduced by seller; property’s basis must be decreased)

2. Exclusions: Certain debts may be eliminated or decreased, but they must be listed on
Form 982 as an exclusion. As follows:

  1. Discharge of debt through bankruptcy
  2. Discharge of debt of insolvent taxpayer
  3. Discharge of qualified farm indebtedness
  4. Discharge of qualified real property business indebtedness
  5. Discharge of qualified principal residence indebtedness

When navigating these exemptions and exclusions, be sure to work with a certified tax
professional with experience in debt settlement.

Work with a licensed tax professional with debt settlement knowledge while negotiating these
exemptions and exclusions.