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Might there be tax pain after medical debt relief?

Earlier this year, we shed light on the challenge many people in Arkansas face due to medical debt. Despite more people now having the benefit of health care insurance, results of a survey revealed the coverage hadn't prevented a lot of respondents from running into significant financial difficulty.

In some cases, the money maladies were so bad that respondents reported they had drained savings. Some said they'd moved in with roommates or sought help with payments through various charities. We suspect some may have opted seek protection through personal bankruptcy.

One of the benefits that can be derived from filing bankruptcy is that unsecured debt, which includes medical debt, can be erased. If the law allows you to file for Chapter 7 protection, you might be able to rid yourself of all unsecured debt. If Chapter 13 is used, you might pay some of the money owed, but any amount remaining at the end of the term would be erased.

In rare situations, someone in debt trouble might get relief through the good grace of a benefactor who forgives what's owed. As readers might appreciate, though, such largesse could lead to tax obligations. The IRS could interpret the forgiven debt as income. So, the debtor might be trading one fiscal headache for another.

This may have been on the minds of some in the wake of a particularly generous gesture made early in June by comedian John Oliver. The host of the HBO show "Last Week Tonight" bought up some $15 million in debt owed by nearly 9,000 people across the country and proceeded to erase it. He took the action in a bid to show how a lack of government oversight of the debt buying industry allows unscrupulous players to get into the market and hound struggling debtors to the point of despair.

Some might wonder if Oliver's move opened relief recipients to hounding by the IRS, but as one pundit observed that doesn't seem to be the case. If those medical bills had been paid, debtors could have deducted them, eliminating the tax threat.

Such nuance is one of the many reasons anyone facing legal issues of any kind should be working with experienced counsel to protect their rights.

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