Skip to main content

The Repercussions of a debt settlement and IRS Form 1099

Middletown, NY |
Filed under: Debt Tax law

I was offered a debt settlement and found out that the banking institution would be sending me a form 1099. I understand that under certain situations even though you have to file that 1099 when you do your taxes, you may not have to pay tax on what the IRS views as "income." At this time my wife and I have a modified mortgage with Beneficial/HFC, but it's not a permanent loan mod. Would I still be responsible to pay this income, even though the original debt was for a home improvement?

Thank You

I want to thank you all thus far for your responses. Mr. Goldberg here is some info that makes me question whether I would have to pay anything on this debt settlement... "According to the IRS, under the Mortgage Debt Relief Act, married people filing a joint return can exclude up to $2 million of forgiven debt on your principal residence from income. (The limit is $1 million for singles or a married person filing a separate return). In other words, if you went through foreclosure, "got your mortgage modified" or did a short sale, you likely don't owe Uncle Sam a dime. Please note the "got your mortgage modified" I've been paying on a loan mod for several months now, so this is where I question what I may or may not have to do...?

+ Read More

Attorney answers 3


The amount of debt you save in negotiation is considered taxable income.

I am a former federal and State prosecutor and have been doing criminal defense work for over 16 years. I was named to the Super Lawyers list as one of the top attorneys in New York for 2012 and 2013. No more than 5 percent of the lawyers in the state are selected by Super Lawyers. Martindale-Hubbell has given me its highest rating - AV Preeminent - in the areas of Criminal Law, Personal Injury, and Litigation. According to Martindale-Hubbell”AV Preeminent is a significant rating accomplishment - a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence." Fewer than 8% of attorneys achieve an AV Preeminent rating. I also have the highest ranking – “superb” – on Avvo. The above answer, and any follow up comments or emails is for informational purposes only and not meant as legal advice.


Any debt settlement generates a 1099 and that amount is taxed as income.

Good luck.


I don't see how the loan mod would have any bearing on your obligation to pay tax on the settled debt. Only your accountant or tax adviser that is fully familiar with your financial circumstances can advise as to whether you will be liable to pay taxes on the forgiven debt. The issue often comes down to whether you are determined to be "insolvent".

This is not legal advice. Seek a consultation with an attorney in your jurisdiction. An attorney/client relationship is not sought or formed by the participation in this website. I am licensed to practice law in New York and New Jersey.

Bankruptcy and debt topics

Recommended articles about Bankruptcy and debt

What others are asking

Can't find what you're looking for?

Post a free question on our public forum.

Ask a Question

- or -

Search for lawyers by reviews and ratings.

Find a Lawyer