Understanding Florida’s Debt Forgiveness Programs and IRS Rules

Have you found yourself unable to make payments on your debts, such as credit card bills, auto loan payments, and mortgage payments? Rather than defaulting and letting them go to collections, you can work with your creditors to negotiate a debt settlement. In this process, you make a lump sum payment for a percentage of the balance you owe, after which the creditor forgives the remaining balance.

Creditors may agree to debt forgiveness for large debt balances, as a lump sum settlement is often preferable to the risk that the debtor defaults on the full sum they owe. Debt forgiveness can also help the borrower avoid more drastic steps to get their finances under control, such as filing for bankruptcy.

However, debt forgiveness in Florida does not come without consequences; specifically, the IRS rules governing debt forgiveness can have financial repercussions for borrowers. This is why it’s so important to understand the Florida debt forgiveness programs and the IRS rules that affect them before you attempt to negotiate a settlement or commit to a debt management plan.

IRS Rules on Forgiven Debt

In many cases, IRS regulations treat forgiven debt as income for a borrower or debtor, earned in the tax year in which the creditor agreed to forgive the debt, because the borrower effectively saves money by not having to pay that forgiven debt. As a result, a borrower whose debts are forgiven may have to report the forgiven debt on their income tax return. A borrower may owe income tax on forgiven debt, and the forgiveness may cause the borrower to be pushed into a higher tax bracket, thereby increasing their income tax liability.

A creditor who agrees to forgive a debt may be required to submit a Form 1099-C to the IRS, which reports forgiven debt totaling $600 or more. For forgiven amounts of less than $600, the creditor is not required to report the forgiveness to the IRS; however, tax laws still require the borrower to report the forgiven amount on their income tax return.

Exceptions to Taxable Debt Forgiveness

Federal tax law and IRS regulations recognize various exceptions to the standard rule that treats forgiven debt as taxable income. These include the following:

• Debts forgiven as a gift or an inheritance left in a will
• Student loans forgiven as part of a program that provides student loan forgiveness for serving in specific forms of employment
• Certain types of student loan forgiveness that occurred between 2021 and 2026
• Student loan forgiveness made under specific assistance repayment programs
• Canceled debt that a borrower could have deducted had they paid it as a cash basis taxpayer
• Reduction of the purchase price of a qualified property
• Debt canceled in Chapter 11 bankruptcy
• Forgiven debt during insolvency
• Debt forgiven under qualified farm indebtedness
• Debt forgiven under real property business indebtedness
• Debt canceled under qualified principal residence indebtedness before 2026

Borrowers should consult experienced legal counsel to determine whether their debt may qualify for an exemption from taxation due to debt forgiveness.

What Is Florida Debt Relief?

Debt relief in Florida may take various forms, each with its own advantages and disadvantages for borrowers. Common Florida debt relief programs include the following:

• Debt Management – Some nonprofit credit counseling organizations will work with creditors to reduce interest rates for credit card debt and personal loans. By negotiating a payment plan with a lower interest rate, borrowers can allocate a larger portion of their monthly payment to principal, thereby paying down debt balances more quickly. However, borrowers must remain current on their monthly payments. Otherwise, a creditor can withdraw the lower interest rate and resume charging a higher one.
• Debt Consolidation Loans – A debt consolidation loan combines various unsecured debt accounts, such as credit card balances, into a single loan. Debt consolidation loans typically offer lower interest rates than credit cards. As a result, a consolidation loan can reduce a borrower’s interest costs and allow them to focus on a single monthly payment, which can help with budgeting and reduce the risk of missing a payment when paying multiple credit cards. However, lenders may not offer consolidation loans to individuals with low credit scores.
• Debt Settlements – In a debt settlement, a borrower agrees to pay a percentage of what they owe on a debt in a lump-sum payment, in exchange for the creditor agreeing to forgive the remaining balance. However, a debt settlement can result in a negative entry on a borrower’s credit report, potentially decreasing their credit score. Federal tax law also treats many forms of forgiven debt as taxable income, requiring the borrower to pay income tax on the amount forgiven.
• Nonprofit Debt Settlement – In recent years, a handful of accredited nonprofit credit counseling agencies have begun offering debt settlement programs. Through these, a borrower can pay a percentage of what they owe on a debt via zero-percent interest monthly payments during a 36-month payment period. Borrowers who miss payments under this program risk having their repayment plan canceled. Furthermore, only a limited number of lenders participate in nonprofit debt settlement programs.
• Bankruptcy – As a last resort, debtors might file for bankruptcy. Although bankruptcy can severely damage the filer’s credit for several years, it can give debtors a fresh start through a bankruptcy discharge and (in Chapter 13 bankruptcy) the ability to repay debts over several years under a court-approved repayment plan. However, Chapter 7 bankruptcies will require debtors to sell a significant portion of their property to repay creditors.

At Loan Lawyers, we take a total debt solution approach to cases, examining every avenue for debt relief to help clients choose the most suitable option that allows them to return to financial health as soon as possible.

Contact Us Today for Debt Relief in Florida

Are you feeling overwhelmed by your debts or struggling to make payments while affording other ordinary expenses? If so, debt forgiveness can provide you with the fresh start you need to get your finances back on track. Before you file, though, it’s important that you understand how IRS rules affect debt forgiveness.

Contact Loan Lawyers today for a free, confidential consultation with a knowledgeable Debt Defense attorney to learn more about your options for debt relief in Florida and get the answers you need to the questions confronting you about how to be debt free. Our firm has helped over 10,000 clients resolve more than $100 million in debt, and we are ready to put this experience to work for you.

Main Location: 3201 Griffin Rd # 100, Fort Lauderdale, FL 33312

Second Location: 101 NE 3rd Ave Suite 1571, Fort Lauderdale, FL 33301