What Are the Tax Implications of Debt Settlement in Florida? 2025

Settling a debt can feel like a good financial step when you are struggling, and it often is. However, it’s important to realize that debt settlement can impact your taxes. What are the tax implications of debt settlement in Florida? Oftentimes, the Internal Revenue Service (IRS) treats the forgiven debt as income and taxes it as such. You should know when debt settlement is not taxed as income and when you may have other options.

The Basics of Debt Settlement

You have debt when you borrow money and have a legal requirement to pay that amount at a later date, whether the amount is fixed or determinable. Debt settlement occurs when you negotiate with the creditor or collector to resolve the debt without paying the full amount you owe.

When this happens, and you pay less than you owe, you end up saving money. While this is beneficial, it is likely that you will owe taxes on the debt amount that you didn’t pay. You must report the amount you saved as income and pay the relevant bracket for income taxes.

Filing a 1099-C Form

When a debt is settled, the creditor or collector that forgave the debt may send a 1099-C form, cancellation of debt. This is only used if the amount forgiven is $600 or more. The creditor files this form and may send you a copy with the date the debt was canceled and the amount that was canceled. Ensure that this information is correct. If the debt is under $600, you will not receive a 1099-C but will still need to report the forgiven amount as additional income.

What Are the Exemptions for Taxation on Debt Settlements?

Most forgiven or settled debt is taxed as income, but there are specific types and reasons for canceled debt that make it exempt from this taxation. Usually, you still need to report the debt settlement and prove the reason for the exemption. In some cases, however, you don’t have to report the settlement. A tax attorney can help you determine when you need to report forgiven debt.

Some types of debt cancellation are exempt because they are not considered income. This includes:

• Debts forgiven as a gift or inheritance, or in a will
• Forgiven student loans with a qualified provision that forgives the loan for employment for a length of time in specific professions
• Specific forgiven student loans from between December 31, 2020, and January 1, 2026
• Student loans forgiven under specific assistance repayment programs
• Canceled debt that would have been deductible if you had paid it as a cash basis taxpayer
• A reduction of the price by a seller of property that is qualified

Other types of debt forgiveness are exempt because they are not included in your gross income, although they are considered cancellation of debt income. This includes:

• Canceled debt in a Title 11 bankruptcy case
• Forgiven debt during insolvency
• Debt forgiven under qualified farm indebtedness
• Canceled debt under real property business indebtedness
• Debt canceled that is qualified principal residence indebtedness discharged prior to January 1, 2026, or in an agreement created before the same date

If you don’t know whether your debt qualifies for these exemptions or not, a tax attorney can help you review your financial circumstances. An attorney can also help you prepare and file your taxes.

Getting Help With Tax Issues in Florida

If you have tax issues in Florida, there are many Taxpayer Assistance Center Offices throughout the state. An experienced attorney can negotiate with the IRS for options like penalty abatement or payment plans while protecting your rights. Some locations include:

• Orlando, at 201 S. Orange Avenue in Suite 1118
• Jacksonville, located at 400 West Bay Street
• Daytona Beach, at 1540 Cornerstone Boulevard in Suite 130
• Tampa, located at 2848 W. Columbus Drive
• Clearwater, located at 10200 49th Street North
• Melbourne, located at 1232 Sarno Road

Find the office closest to you with the IRS Office locator tool.

FAQs About Debt Settlement Tax Implications in Florida

Does Debt Settlement Affect Your Taxes?

Debt settlement can increase your taxable income. The IRS considers most debt forgiveness as taxable income because you did not have to pay the debt in full, therefore saving significant money. Depending on the value of the settled or canceled debt, this may be a significant cost for you in terms of your taxes. Some settled debts are not taxable, such as if they are under a certain value or are exempt for another reason.

Do I Have to Report Debt Settlement Money to the IRS?

In most cases, you must report debt settlement money to the IRS. Most canceled, forgiven, settled, or discharged debt must be reported because it is taxable, as it is money that you should have paid but were able to keep. There are some cases where debt settlement is not taxable, but these exceptions may still need to be reported to prove they are exemptions. A tax attorney can help you understand how to structure your taxes after debt settlement.

What Types of Debt Settlements Are Not Taxable?

Some of the debt settlements that are not taxable include the following:

• Debts canceled as a gift or inheritance
• Debt canceled in a Title 11 bankruptcy
• Specific student loans, including those under some student loan repayment assistance programs or those with provisions for cancellation under certain circumstances
• Canceled debt value that would have been deductible if you had paid
• Qualified price reductions by a seller to you as a buyer
• Debt canceled for insolvency

How Does Debt Settlement Affect Your Credit?

Debt settlement can positively and negatively affect your credit. Your credit is first negatively affected because it will show that you did not pay off the debt as you agreed to, and the charge-off by the creditor will show on your credit report. However, when debt forgiveness means you will have greater financial freedom to pay back other debts in the future, it can improve your credit in the long term.

Work With TaxSmith, LLC for Your Debt Settlement Planning

It’s important to plan properly for debt settlement and how that affects your taxes. An experienced tax law attorney can review your options and determine if you can secure a debt settlement that is exempt from taxation. At TaxSmith, LLC, we have decades of experience in tax codes and can help you approach your tax and debt issues effectively. Contact our firm today.