As many of us who have settled out debts for less than the amount owed, we are always told that the credit card company will send a 1099-C for the amount forgiven. We are also told that we may have to pay taxes on the amount forgiven. Don't worry too much about this. As I explain below, there are situations when you don't have to claim these amounts as income and pay taxes on them. such as insolvency, bankruptcy and foreclosure. My explanation of form 1099-C below deals only with debtors that were insolvent at the time of the cancelation of any debt. Forgiveness of debts for foreclosure or bankruptcy are not discussed below.
When a debt is settled, the credit card company will send a 1099-C with the amount forgiven. For most of us in a situation where we have to settle our debts, WE DO NOT HAVE TO CLAIM THE FORGIVEN AMOUNT AS INCOME AND WILL NOT HAVE TO PAY TAXES ON THAT AMOUNT.
First, if you look at the instructions that come with the 1099-C, you will see that the instructions indicate that "some canceled debts are not includible, or fully includible, in your income..." Further, the instructions indicate that you should "not include canceled debts in your income to the extent that you were insolvent immediately before the cancellation of the debt." For further instruction, you can look at IRS Publication 4681, which further defines insolvency.
The IRS defines insolvency as when the total of all of your liabilities exeeded the fair market value of allof your assets immediately before the cancellation. Assets include everything that you own. For an easy way to determine whether you were insolvent, there is a worksheet to fill out on page 6 of IRS Publication 4681.
If you fill out the worksheet and confirm your insolvency, then all you have to do is fill out and file with your taxes, IRS Form 982.
Many people are scared or worried about settling their credit card debts because they think that they will incur a larger tax bill. Prior to settling any debts, go to IRS Publication 4681 and complete the worksheet on insolvency. If you are insolvent, then settle away....
*This post is not meant to give tax or legal advice. This is merely a guide on possible resolutions to problems that may arise as you settle your debts. Please consult a tax attorney or other tax professional if you have questions or need further guidance. Each individual's personal circumstances are different and you may need professional assistance.
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how'd you settle with Chase ? did it go to collectors? or have you settled all of your debts with the credit companies themselves
ReplyDeleteI was past due by about 4 months. I ignored their calls during that time. I called them one day and asked to settle. I told them my financial situation. They asked me how much I wanted to pay. I told them. They agreed. I made two payments over 30 days. It was pretty easy.
ReplyDeleteOn another note, I have settled with both credit card companies and debt collectors. The process is the same with both. It just takes a little patience. If you want to ask any other questions, I am more than willing to try and help. You can send me an e-mail at free3737@yahoo.com
ReplyDeleteGood luck and look at my posting about how to go about settling your debts...