What Form Do You Have to File if You Get a Settlement on a Credit Card?

Credit is important to modern-day life, but even a temporary loss of income or financial hardship can make it impossible to meet the minimum payments on a credit account. The addition of late fees and finance charges can cause a credit card balance to grow out of control. A credit card settlement may be the answer, but it's a good idea to know what tax form you have to file if you do get a settlement on a credit card.

Debt Settlement

Debt settlement may also be referred to as debt negotiation or resolution. A debt settlement occurs when you or someone working on your behalf arranges to pay off your unsecured debt for an amount significantly less than the total owed on the account. Often, a settlement agreement can be as much as 70 percent of the full balance. Many creditors and collection agencies are willing to settle on accounts that have been delinquent for several months with no payment. The remaining portion of the debt becomes forgiven debt that you are no longer required to pay.

Debt Forgiveness Tax Implications

If you do work out a settlement arrangement with your credit card company or debt collection agency, you should be aware of the tax implications you could face. The IRS considers any forgiven debt from a credit card, installment loan or mortgage to be income. Should you get a settlement to pay only $1,000 out of $3,000 owed on a past-due account, the IRS considers that $2,000 of forgiven debt to be income for which you will likely owe income taxes.

Filing the Right Form

When you arrange a credit card settlement where more than $600 of debt is forgiven, the creditor is required to issue a form 1099-C cancellation of debt notice. You must treat this form just like a traditional 1099 or W-2 income tax form, and you are required to report the amounts shown on the 1099-C as other income on your taxes. The total is factored in to your overall income tax burden for the tax year.

Exceptions

There may be an exception to filing this form for a credit card settlement if you meet certain conditions. If you can prove insolvency, you may be exempt from paying taxes on forgiven debt. To be considered insolvent, you must be able to prove that you owe more money than you are worth and that your liabilities exceed the fair market value of any assets. You may also be exempt if you filed bankruptcy before receiving a debt settlement. In both cases, you must file Form 982 along with a description of all assets and liabilities.