Do you get a tax bill after debt resolution?

By Gina Freeman

Reviewed by James Heflin

Apr 30, 2024

Read time: 5 min

couple paying bills on the mobile phone during breakfast at home

Key takeaways:

  • Some types of debt forgiveness are taxable, but not all.

  • Debt discharged through individual bankruptcy isn’t usually taxable.

  • Debt discharged through debt resolution is generally taxable—unless you’re insolvent.

  • Insolvent means you owe more than you own.

Every debt problem has at least one solution, so don’t get discouraged. And every potential path to debt freedom has positives and negatives, so it’s smart to do your research. As part of it, consider the possible tax consequences of debt resolution versus other strategies

Spoiler alert: Not everyone pays taxes on forgiven debt (but some folks do). Let’s explore the connection between taxes and debt resolution.

What is debt resolution and why is it taxable?

Debt resolution is getting rid of a debt for less than the full amount you owe. The way debt resolution works is that once you pay the agreed amount, your creditor agrees to forgive the rest and close out the debt.  

The IRS considers forgiven debt to be taxable income. That makes sense in a way, because forgiven debt has the same impact on your bottom line as additional income.

If you earn $40,000 this year and a creditor forgives $5,000 in debt, you effectively received $45,000 this year.

At least, that’s how the IRS sees it. And naturally, they want their cut. This can impact which debt solution you choose, because not all forms of debt forgiveness are taxable. 

Debt resolution isn’t always taxable. But sometimes it is, and you’ll want to know that before you crunch the numbers and compare debt solutions.

When is debt forgiveness tax-free? 

Debts that are discharged (forgiven) in bankruptcy aren't usually taxed. Yes, forgiven debt is still technically income, but the IRS gives people who discharge debt in bankruptcy a break. 

Bankruptcy filers have to submit financial information to a court for review and do whatever the bankruptcy judge says. The bankruptcy process ensures that consumers who file bankruptcy pay their creditors as much as they can afford. Saddling these people with additional costs when they’ve paid everything they’re supposed to defeats the purpose of bankruptcy.

Similarly, some people who go through debt resolution could also get a break on their taxes. 

If you are insolvent, you could get tax-free debt forgiveness without going through bankruptcy

Insolvency means that your total debts (what you owe) exceed your total assets (what you own). In other words, if you sold everything you own, you couldn’t get enough money to clear your debts. 

Leave debt behind, so you can move forward

Get rid of your debt and free up your cash flow without a loan or great credit.

How do you know if you have to pay taxes on canceled debt? 

The IRS provides a worksheet to help you determine whether you’re insolvent. To apply for this tax break, you would need to show the IRS that you’re insolvent by submitting IRS Form 982 with your annual tax return. You could work through the calculations using an Insolvency Determination Worksheet and the fair market value of your assets. If the total debt exceeds the total assets, you could be insolvent. 

Note that we aren’t tax pros and can’t advise you on your specific tax situation. The forms and instructions are available online for anyone to access. Consult a tax professional who can help you make sure your worksheet is complete and correct. 

Complete that worksheet before you decide on a debt solution. The results help you know whether you could qualify for tax-free debt forgiveness without filing bankruptcy. 

Here’s a sample calculation for a woman we’ll call Christine:

Debts (what she owes)

Assets (what she owns)

$25,000 in credit card debt

$2,000 in the bank

$45,000 in medical debt

$5,000 jewelry

$20,000 on a car loan

$20,000 car

$400,000 on a mortgage

$455,000 home

Total debt: $490,000

Total assets: $482,000

Because her debts are larger than her assets, the IRS could consider Christine insolvent.

It’s smart to document these things. You can show your debt balances by providing a copy of your credit report (if all debts are listed), or your most recent account statements. 

You could show the value of your assets with insurance paperwork, printouts from online real estate valuation services like Zillow, professional appraisals of art, jewelry, collectibles, and real estate, printouts from vehicle valuation sites like Kelley Blue Book, and bank, investment, and retirement account statements. 

To be clear, you don’t have to send the worksheet or supporting documents to the IRS—just the Form 982. But the IRS recommends that you hold onto records that could back up your tax return in case you’re audited in the future.

Avoiding debt resolution taxes when you’re insolvent

It’s not enough to determine that you’re insolvent. You also need to know exactly how insolvent you are. It’s possible to be taxed on a portion of your forgiven debt.

Christine is $8,000 insolvent. If she receives more than that amount of debt forgiveness, she might owe income taxes on the forgiven debt above the first $8,000.

Example of tax-free debt resolution

Don is overwhelmed by debt he can’t afford to repay. He’d prefer to avoid bankruptcy because he’d probably have to give up a collectible car that his grandfather left him. It has a lot of sentimental value. Don wants to try to resolve his debts if it makes sense. 

Don owes just over $30,000 in credit card debt. A debt expert advises him that he may be able to negotiate the debt down to $15,000, and Don wants to calculate the potential tax consequences.

Don’s assets include:

  • His grandfather’s vehicle, which is worth $10,000

  • $2,000 in the bank

  • Another car worth about $3,000 

Don has $15,000 in assets. He has no debts other than the $30,000 in credit card balances. 





Amount of insolvency


His insolvency equals $15,000 (his debts are $15,000 greater than his assets). 

If Don’s creditors forgive half of his $30,000 debt, he won’t owe debt forgiveness taxes because the amount of debt forgiveness ($15,000) doesn’t exceed the amount of insolvency (also $15,000). 

What’s next?

If you’re considering debt resolution, the tax situation could impact your potential savings. 

  • Look up the IRS Insolvency Determination Worksheet online.

  • Get the information you need to complete the form (debt balances and asset values).

Complete the form or contact a debt expert for a free analysis.

Gina Freeman - Author

Gina Freeman has been covering personal finance topics for over 20 years. She loves helping consumers understand tough topics and make confident decisions. Her professional history includes mortgage lending, credit scoring, taxes, and bankruptcy. Gina has a BS in financial management from the University of Nevada.

James Heflin - Author

James is a financial editor for Achieve. He has been an editor for The Ascent (The Motley Fool) and was the arts editor at The Valley Advocate newspaper in Western Massachusetts for many years. He holds an MFA from the University of Massachusetts Amherst and an MA from Hollins University. His book Krakatoa Picnic came out in 2017.

Frequently asked questions

If someone pays off my debt, is that considered income?

It depends on how you receive the payment. If the money is given to you to pay off the debt, it might qualify as a non-taxable gift. If it's more than $18,000, the giver may need to report the gift to the IRS, but that doesn’t make it taxable for you. If your employer pays off your student loan or other debt, you may have to pay taxes because that’s considered taxable income. Your employer can include those payments on your W-2.

Talk to a qualified tax professional about your situation.

There is no tax credit or tax deduction for debt resolution.

No, you don’t get a 1099 for debt consolidation. Debt consolidation means taking out a new loan and using it to pay off more than one debt. 

You may receive a 1099-C from a creditor after debt resolution, showing that a portion of your debt was forgiven. Forgiven debt is considered taxable income by the IRS. However, you may not have to pay income taxes on forgiven debt if you can show that you were insolvent at the time you resolved your debts. Insolvent means the total of your debts is greater than the total of your assets (the things you own).

Article Topics

A clear path out of debt

Get rid of your debt and free up your cash flow without a loan or great credit.

At Achieve, it’s not what we stand for, it’s who.

Achieve Person