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Paul Yamilkoski

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Can Your Credit Affect Your Taxes?

I had someone pose an interesting question. “Can your credit affect your taxes?”

At first, I was inclined to say no. Your credit score does not affect your taxes at all. But then it got me to thinking about it further. I don’t know if many people have given it much thought, but there is a way that your efforts to address items on your credit could have tax implications.

I am talking about efforts to settle debts that appear on your credit report ( heck, even those that don’t show up on your report for that matter).

Just about every client I have ever worked with has had at least one collection with a balance on their credit report. Most of those clients also wanted to get the debt settled, so they wouldn’t have to worry about it any more. I respect and applaud their desire to make things right.


What many people don’t realize, is that when you settle a debt that results in the forgiveness or cancellation of a debt of more than $600, the company can issue you a 1099-C Cancellation of Debt form. This would also be reported to the IRS. The amount of the debt forgiven or cancelled, must be reported as income on your taxes. If you fail to properly handle those debts, you could be looking at a very large tax bill, or worse, penalties for not paying the taxes due.

There are many types of debts that can result in receiving a 1099-C. Credit card debts, utility bill debts, medical collections, short sales and repossessions are just a few possibilities, basically any debt where more than $600 of debt is forgiven or cancelled.

I have seen clients settle a large debt, for pennies on the dollar, thinking they got a great deal and it was all done and behind them, to then have to shell out another $5,000 to the government instead of getting a tax return (in this case it was a very large debt). You can imaging that they were more than a little shocked and disappointed.

I have also had clients throw away the 1099-C form, thinking it was just a notice letting them know the debt was forgiven and no longer owed. It is very important that you pay close attention to such notices and not throw them away. When in doubt about what the form is, talk to  your tax preparer. They can help you determine what needs to be done.

I have also had clients that received a 1099-C before they even paid anything on the debt and, as a result, thought they didn’t have to pay the agreed amount. One of those clients ended up having a judgment placed against them for that debt to go along with the added tax burden that eventually resulted.

I have even heard of people receiving a 1099-C for debts included in a bankruptcy, though those likely would qualify for an exception. There are some exceptions allowed that would limit or eliminate your burden. I suggest consulting your tax advisor to find out if any might apply to you.

I think the big thing I would like to get across is that there can be tax implications when settling debts, and they can get pretty confusing. I would always encourage that you work with a professional, when settling debts, so your credit report updates properly and you are aware of what to expect from the transaction and know what to do next. Your tax preparer can be a great resource for tax related questions. A reputable credit restoration company like Heartland Credit Restoration can help you settle those debts and guide you to what to expect going forward, as well as make sure your credit report is properly updated, so you don’t experience any negative effects of improper reporting by the creditor.

I welcome your comments and ask that you share this information with all your contacts on social media. We at Heartland Credit Restoration are all about helping people get positive control over their credit, and the more people that know this kind of information, the better.

If you are facing credit challenges, or you have a client that you are going to have to turn away due to credit challenges, then I encourage you to give me a call. We can look at how Heartland Credit Restoration might be able to help you turn things around and get that credit loan ready. There isn’t a better company you can go to for help. I will look forward to talking to you and I hope you have a wonderfully blessed day!

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