When you complete a debt settlement, the difference between the total amount of the debt you owe and the reduced amount you pay back is “forgiven,” meaning you are not responsible for paying it. Unfortunately, the IRS treats forgiven debts as income, which means you may have to pay income tax on the forgiven debt. In this case, you will want to set aside funds to cover those taxes. In some cases, borrowers who settle their debts may qualify for insolvency, which means their total liabilities exceed their total assets, in which case the forgiven debt may be excluded. Forgiven debt may also qualify for exclusion if the debt was discharged in a Chapter 11 bankruptcy. To find out whether you will qualify for insolvency following your debt settlement, consult a knowledgeable Los Angeles debt settlement attorney.