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Forgiven Debt

Forgive but collect is the IRS motto when it comes to forgiven debt.

Did you lose control of your credit cards to the point that you simply were unable to pay the balance? What a relief it was when you discovered you could negotiate with your credit card company to get it to accept just half of what you owed.

Getting your credit card bill cut from eight grand to $4,000 certainly helped your personal bottom line. It also could be a boon to the U.S. Treasury. Why? The tax law generally considers the amount you get Visa, MasterCard or any creditor to write off as earned, and therefore taxable, income to you. Expect the accommodating debt-holder to send you a Form 1099 detailing your discharge of indebtedness as miscellaneous income.

You say you didn't get the official tax statement? Don't breathe too easy. It's quite possible that your unexpected "income" was reported to the IRS even though the company accountant didn't fill out your form.

Not every debt settlement, however, has to pad Uncle Sam's pocket. Check out this Bankrate story for more on taxes and discharged debt, including instances where you don't have to count the forgiven debt as taxable income.

And to avoid getting into the situation where you have to throw yourself on the mercy of those you owe, take a look at Bankrate's Guide to Managing Your Debt.

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