Deb settlement programs and bankruptcy may have significant implications for your tax situation.


A debt settlement program can get a debtor out of debt fast and save them tens of thousands of dollars, but there are a couple of minor downsides, such as potential tax liability. The IRS will consider any forgiven debt to be taxable income, however, there are ways to exempt yourself from paying tax on it.

One of the most common concerns faced by debtors during our Debt settlement program is how the Program will impact their taxes. During the Program, we will negotiate closely with your creditors to settle each enrolled debt for less than the full amount owed. However, when a creditor partially relieves a debtor from a debt obligation, the amount that is forgiven is called cancellation of debt (“COD”) and usually is considered taxable income by the IRS. Thus, each debtor (1) must recognize COD income to the extent that a debt is discharged for less than the amount owed, and (2) must report all COD on their tax return for the year the cancellation occurs.

For example, if you owed $10,000 on credit and we negotiated with your creditor to settle the debt for $6,000, the $4,000 forgiven debt may be considered taxable income. In theory, the concept could be straightforward but in practice recognition of COD income is subject to exceptions and exclusions.

During our debt relief program, you will receive a Form 1099-C, also called “the Cancellation of Debt Form”, from your creditors after a debt is forgiven or canceled. Form 1099-C will inform you about the amount of the debt that has been canceled and the date of the cancellation. This Form is important because you will need to include it on your tax return. Even if you will not receive a Form 1099-C from your creditors, you are legally required to report any canceled debt as taxable income. If you fail to do so, you may be penalized with fines. However, as discussed above, there are some exceptions and exclusions to the general rule in which COD is not considered taxable income and you may be exempt from reporting it to the IRS.

COD is not taxable if the law allows you to exclude it from your gross income.


  • Debt canceled to the extent of insolvent,
  • Debt canceled in a Title 11 bankruptcy case,
  • Cancellation of qualified real property business indebtedness,
  • Cancellation of qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2026, and
  • Cancellation of qualified farm indebtedness.

Also, if you meet one of the following exceptions, you may exclude canceled debt from your income.


  • Amounts canceled as gifts, bequests, inheritances, or devises,
  • Any amounts discharged from certain federal, private, or educational student loans,
  • Certain qualified student loans were canceled under the loan provisions that the loans would be canceled if you work for a certain period of time in certain professions for a broad class of employers,
  • Certain student loan discharges after December 31, 2020, and before January 1, 2026,
  • Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas,
  • A qualified purchase price reduction given by the seller of the property to the buyer, and
  • Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer.

It is important for you to understand forgiven or canceled debt and how it could impact your tax return.  For more information, visit


Filing for bankruptcy may have an impact on your taxable income. However, the extent of that impact will depend on your personal circumstances and the type of bankruptcy you file for.  It is important to understand that bankruptcy may result in unanticipated adverse tax consequences and expose a person to personal liability.

Generally, during the length of a bankruptcy process, a debtor is subject to state tax laws (such as property, sales, and use) as well as federal income tax laws (such as employment taxes and payroll). In addition, the debtor must pay federal and state income tax due and file federal income tax returns. If the debtor fails to timely pay income tax due and file income tax returns in a bankruptcy proceeding, they may have penalties and interests with the IRS. Also, if you file for bankruptcy and are expecting a tax refund, the Bankruptcy court has the power to intercept your tax refunds and use them to repay your debts. 

Bankruptcy does not relieve the debtor of their obligations to the IRS, but it may provide relief for some tax debt. For example, bankruptcy could markedly shift the timing, nature, and extent of the debtor’s obligations to pay taxes. Also, in bankruptcy, a debtor may be able to get a discharge for certain specified types of debts. For more information, visit

While our debt relief program may be beneficial for debtors who are having financial difficulties repaying their debts and want to avoid bankruptcy, other debtors may consider that bankruptcy is best for them. Please, keep in mind that at Paramount Law, our experienced attorneys will help you and be happy to answer any questions that you may have.