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why do you pay taxes on a debt settlement?

Hello, it is because the IRS has decided that the savings you make from the money you do not have to pay the credit card companies back is actually “income”. Odd, but true.

So if your balance on the credit card debt is $30,000 but you hire a settlement company who settles it so that you owe only $16,000, then the $14,000 you saved is considered taxable income even though you did not actually receive that money that you saved.

Thanks for the question.