When a creditor agrees to settle a claim for a reduced amount, the amount of debt foregiven can result in taxable income. For example, if you owe $20,000 on a credit card and a settlement is reached where they agree to accept $11,000 as payment in full, the creditor is foregiving $9,000.00 of the claim. In that circumstance, the creditor will issue a 1099c to you for the foregiveness of debt. That $9,000.00 will count as income to you. There are some exceptions. If you can show you are insolvent you can avoid liability. Bankruptcy is also an exception. For example, if you filed a chapter 7 to eliminate that $20,000.00 credit card, there would not be any tax liability even though the entire $20,000.00 was eliminated. Depending on circumstances debt negotiations may be an option, but be sure to take into account the tax consequences when deciding between bankruptcy and debt negotiation. And since both the IRS laws and the Bankruptcy laws are Federal Laws, the result would be the same whether you lived in New Jersey or Pennsylvania.