Thursday, July 19, 2007

Paying taxes for forgiven debt

Another article on paying taxes on a forgiven debt. Any debt that is forgiven by your lender is considered income. Fortunately most of us won't have to face these kinds of problems. Very few of us are $200,000 in debt. The average credit card debt is only $9k.

What gets me is that you aren't just paying taxes on the money you borrowed and never paid back. I suppose I can understand that, as the lender gets breaks as well when it writes off unrecovered debts. But how much of that "debt" isn't what you borrowed...but just interest and fees? I borrow $5k from the lending company, miss a payment and lose my job, and they write off a balance of $10k after a year because of all the fees. So I pay taxes on 10k instead of 5k? That's a little hard to stomach, especially since default rates and fees are just absurd.

Which makes me wonder, if I borrow $5k and they add a ton of fees and charges to hike up the balance, do they WANT me to pay? What happens when a lender writes of a debt? Tax breaks? At what point does it become more profitable to artificially inflate a bad debt into oblivion and write it off/forgive it rather than spend all the money and time trying to collect the original balance?

Of course it also costs them to issue you a 1099, so they may not even do it if they only "forgive" a few hundred bucks.

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