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Can a creditor report me to the IRS for falling behind on payments?

I took out a cash advance on one of my credit cards and then got behind on the payments. I got a call from the credit card company and they said if I didn't pay them, they were going to report me to the IRS and I would have to pay taxes on the money I owed. Can they do this? -Cate

Dear Cate,

Your credit card company is telling you that they are planning to forgive your debt. The credit card company will issue you Form 1099-C, Cancellation of Debt, and you will be expected to report the cash as income.

The only way you wouldn’t owe taxes on the money is by proving to the IRS that you are insolvent. Being insolvent means that you have more liabilities than assets.

Before you get knee-deep in the tax code, my recommendation is to visit with a credit counselor to see if they might be able to negotiate a repayment plan with your creditor(s). Our certified counselors are ready to take your call at 800.432.7310.

Good Luck!

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