By going through a Chapter 13 or Chapter 7 bankruptcy, there are no adverse tax consequences to a client. What many people do not realize is that when you consolidate debt and settle with your creditors, the creditors have the option (which they exercise regularly) to 1099 you for their loss. This means that the $10,000.00 debt settled for $5,000.00 is seen as $5,000.00 of income to the consumer at the end of the year. Added up this can make a huge difference. If a client “saves” $20,000.00 in settling 4 accounts and is the given a 1099 for the income equivalent of $20,000.00 to add to their taxable income, that is a huge income gain to be included in their taxes at the end of the year!