Financial abatement and insolvency status

Insolvency can be understood as a state or condition where the total financial liabilities of a person or an organization exceed the total financial assets of that particular individual or entity. A closely related financial condition referred to as cash-flow insolvency is said to exist when a person or organization can not meet its financial obligations as they come due. Insolvency occurs whenever the liabilities, or debts, exceed the total value of assets and the associated cash inflow. Once a company declares insolvency, it is recommended the management take immediate action to generate sufficient cash and settle or renegotiate current debts and achieve “break even” status. Failure to do this may result into bankruptcy proceedings, receivership, or liquidation of all assets by the creditors.

Insolvency and taxation issue
Financial experts claim that debt cancelled through debt settlement program program is still considered as taxable income. On the surface it sounds true if you briefly study the IRS guidelines. The fact is as per the guidelines creditors are required to report forgiven or cancelled debts greater than $600 on form 1099. This enables the IRS to scrutinize how to go for credit card debt settlement program to eliminate credit card debt for less than the full balance. That’s where the issue comes in - the IRS views this cancelled debt as taxable income and wants you to pay taxes on it.

On the contrary, the truth is that most of those who choose a debt negotiation service are NOT liable for taxes on the forgiven debt. The IRS in fact provides an exception for debtors who are registered or declared as “insolvent” prior to the debt negotiations activity. If you are insolvent before negotiating credit card debt, you don’t have to pay additional tax on the outstanding amount that has been waived off. Business debt consolidation loans and debt elimination programs offered to consolidate bills by debt negotiation companies are the best way out to settle your debt.