Will I have a tax liability for a debt settlement?

Tips and Deals Forums Debt Management Will I have a tax liability for a debt settlement?

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      My wife had a house with her ex-husband. In the divorce she signed a quit claim deed for the house (yes she knows that was dumb now). After this the husband stopped paying the house payments, let the house go into forclosure and then he filed BK. Since then she has been contacted from the USDA rural housing authority for the difference of the debt after they sold the house in forcelosure. They have given her the option to make payments on the debt or a settlement on the debt. What I’m wondering is if we do make a settle ment on the debt will there be any tax liability for the amount of the debt that is written off afterwords?
      Thanks for the response Max. So basically the amount of the written off debt would be considered income and that amount would actually be taxable, is this correct? Are there any situations where this would not be considered income and thus not taxable?
      While the quit claim deed absolved her of responsibility of the loan by transfering it to her ex husband, she still had the underlying responsibilty with the initial loan that doesn’t go away. Since he filed BK she became fully liable for the debt. She has 3 choices sue him (worthless), BK, or settlement options.

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