Cancellation of debt is an IRS term. When you settle a debt, the creditor will issue you a 1099-C (“Cancellation of Debt”) form reflecting the amount of the debt cancelled through the settlement, and that money may be considered taxable income.

Whether cancellation of debt is going to be a taxable event for you is best left to your CPA to decide, and it might be wise to meet with a CPA prior to settling debts. But the general rule is that if you have a negative net worth at the time of the debt settlement, it’s not a taxable event. If you have a positive net worth at the time of the debt settlement, it will be a taxable event, so any amount of money the settlement saved you would count as taxable income.