Generally in the United States, the IRS considers a debt which is canceled or forgiven as your gross income and you must include this amount when you file taxes as your “income”. For example, if you had borrowed $16,000 on your credit cards and settled it for $9,000 the $7,000 difference is taxable income as it is not repaid. Your creditors can also issue you a 1099-C-Cancellation of Debt for a forgiven debt over $600.
However, there are exceptions and the IRS will often waive this tax liability , if you can prove that you were insolvent (your total liabilities exceeded your total assets) during the time at which your debt settlement took place. For this you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your Federal Income Tax return. We highly recommend you to contact your tax advisor for further discussion as to whether the insolvency provision is applicable to you.