Hi everyone and welcome back to Money Girls Quick and Dirty Tips for a richer life.

I'm Laura Adams.

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If you've had a tough time paying a debt, like a mortgage or a credit card, you may have wondered

what would happen if all or a portion of it was settled or forgiven.

If a creditor lowers or completely cancels a debt that you owe,

does that amount of money just vanish into thin air?

In this podcast, we'll cover what happens if a debt is forgiven and

when you have to pay tax on it. Here's an example of a cancelled debt. Let's say

you have a $15,000 credit card balance and stop making payments because you lose your job.

You call the credit card company and negotiate with them to reduce your total debt to

9,000 on the condition that you pay $4,500 this month and $4,500 next month.

If they settle with you by accepting a total of $9,000 on a $15,000 debt, they cancel the difference or $6,000.

But that's not the end of the story, because the amount that gets cancelled gets added to your taxable income.

If your average tax rate is 25%, you'll have to shell out $1,500 on that amount of forgiven debt.

So though you originally were saving 6,000, you're really only saving 4,500 after taxes, which is still significant, but can

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