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DON'T BE HAMMERED BY YOUR DEBT

DON'T BE HAMMERED BY YOUR DEBT

Tuesday, January 09, 2007

THE IRS ALWAYS GETS THEIR'S, THE NASTY SURPRISE OF DEBT CANCELLATION OR IRS FORM 1099C

Everyone knows the old saying, nothing is certain but death and taxes. Well, even in the world of debt collection, taxes are a certainty. Unfortunately, taxes are a certainty that many consumers are told to expect and come as a nasty after the fact surprise. Millions of Americans are working with debt consolidation companies to have part of their credit card debt forgiven. It sounds almost too good to be true, the interest and late fees and other penalties and fees are magically wiped out and the debtor is allowed to repay the principal debt on a monthly basis without more interest accruing. Sometimes, if the debtor's situation is extremely dire or the debtor can offer a large lump sum payment, some of the actual principal debt may be wiped out. Compromises of large balances are almost the norm for second and third tier debt purchasers. In other words, if you default on your credit card balance, the credit card company may write off your debt as a bad debt and then sell your account to a debt buyer for pennies on the dollar. Your debt may even be sold multiple times, each time for less money. The company you end up paying may be more than happy to accept a deeply discounted payment as payment in full. But months later, you will receive a nasty surprise. You will receive a 1099 C which is the IRS form the creditor used to report the cancellation of part of your debt. You see when you don't have to repay a debt you have incurred, the IRS says that becomes income and as income, you owe them taxes on it. Under IRS rules and regulations, any debt forgiven which is more than $600.00 must be reported on a form 1099 C Cancellation of Debt and stated as income on your tax return. In other words, if you run up a credit card bill of $10,000 and the credit card company or whoever buys their bad debt accepts $5,000 as payment in full, you have received the benefit of $5,000 dollars you didn't have to repay. In the eyes of the IRS, it is the same as if you earned $5,000 at your job. If you fail to report it, you can be guilty of tax fraud. But don't worry, the IRS will already know about it because they will receive a copy of the 1099 C the creditor sends you and they will recalculate your return, assess taxes and penalties and interest against you. So when you are feeling great about getting your debts cut in half or even better, remember that Uncle Sam will come looking for his and usually with interest and penalties.

46 comments:

Mike W. said...

Isn't the creditor committing tax fraud by submitting a 1099-C on a disputed debt?

Michael Herrin said...

Absolutely not, there are clear IRS regulations governing this situation. Forgiveness of a debt, even a disputed debt, is INCOME.

Anonymous said...

If a debt purchaser buys a $20,000 credit card debt for $1,000, and settles for $5,000, aren't they committing tax fraud by saying they forgave $15,000? After all, they are not a credit grantor, and their basis in the debt is significantly less than the amount settled. They have no loss, only a gain.
Thank you.

Moose said...

This isn't so much a comment as a question I thought you could help me with.


Two quick questions regarding collectors and debts.

1. At the moment, a law firm is attempting to collect a significant-sized debt (one of many from a failed business venture). The lawyer has told me if I can't come up with a sizable payment that they will move to asset collection.
The only "assets" I have are at 95% or higher loan-to-value.
What concerns should I have then if this is the case?

2. I actually do want to pay my debts back when I am able. But it's going to some time.
I'm currently working on a few marketing projects that could produce chunks of income, but that raises another question.
How do I protect that money long enough (from judgements and/or account freezes) to pay the month's bills and give some money to my lawyer to start paying things off?

T. Rockmann said...

Michael,

Great blog, I found it through a link on DIGG and added a link to my site at http://www.creditdetox.com my readership will find your info very helpful I'm sure.

Quick question, in the case of Casey Serin http://www.iamfacingforeclosure.com/, who has already lost three homes to foreclosure and two more are on the way, will have a huge tax bill. But, the question is, can he also file bankruptcy and then have these all discharged as well from the IRS?

T. Rockkmann
http://www.creditdetox.com

Michael Herrin said...

The IRS gets special treatment in bankruptcy and their liens are generally non-dischargable.

1099C said...

Hi, this blog is a huge help, thank you.

If I send a debtor a 1099C do I lose my right to try to collect the debt? Is there any problem with trying to "motivate" a business debtor by informing them that I will file a 1099C if they do not pay their debt? How about an individual debtor?

Thank you.

Anonymous said...

Disputed debt is excludable from income under Zarin v Commissioner (916 F2d 110 - 3rd Cir, 1990). If a debt is disputed because it has been paid or if the amount is incorrect and the creditor sends a 1099-c you are literally paying taxes on a non-debt. That is not fair. Even if you settle and you included in the settlement documents a statement that you are only paying the undisputed amount and the unpaid amount is disputed and the creditor acknowledges the dispute, then you should be able to claim the cancelled debt as excludable from income under Zarin v Commissioner (916 F2d 110 - 3rd Cir, 1990).

Michael Herrin said...

Zarin absolutely does not say what you say it does. Reliance on Zarin would be extremely dangerous. Zarin was an exceptionally unusual case with very specific facts. Under IRS regs, in order for forgiven debt to be income it must either be indebtness (A) for which the taxpayer is liable, or (B) subject to which the taxpayer holds property. Neither applied to Zarin. Zarin was a high roller who lost millions at a New Jersey casino. The casino had continued extending credit to Zarin after the New Jersey Casino Control Commission issued an Emergency Order, the effect of which was to make further extensions of credit to Zarin illegal. As such the court held that the extensions of credit were illigal and unenforcable and that gambling chips were not property, but rather, “a medium of exchange within the Resorts casino” and a “substitute for cash. So the tax court said the illigal extensions of credit made by the casino were not a lawful debt. The court absolutely did not say that disputed debt is not income.

Anonymous said...

You just proved my point. You said, "Under IRS regs, in order for forgiven debt to be income it must either be indebtness (A) for which the taxpayer is liable, or (B) subject to which the taxpayer holds property." If a debt is disputed because the taxpayer is not liable for a debt (ie. there is no debt because it has been paid) then it is not income. Therefore a credit card company should not be sending you a 1099-c on a disputed debt. To do so would be double jeopardy, the debt is paid but now you are expected to pay taxes on it.

Anonymous said...

I am a Mortgage Broker in Kansas and I have a client who has recieved a 1099C form from a creditor. It has been filed on her 2006 taxes. The creditor hired a law firm and filed a judgement on my client 2 years ago for this debt. I am trying to clear up the judgement but The attorney says that they can still collect on this debt and will not release this judgement. In everything I have read on this matter it appears the creditor can never try to recollect on this debt. Any Ideas or clarifications of the laws involving a 1099C. Thanks Jeff

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Anonymous said...

I would like a clarification on 1099 laws also.

In 2002 a creditor sold my debt to a Law firm collection agency. I paid the full balance owed, to the collection agency. Have not had contact w/ either the creditor or the collection agency since.
However recently I recieved notice from the IRS that the creditor filed a 1099C on my debt in 2005, three years later. The 1099C filed was in an amount more than double the original debt. I was never informed the 1099C was being filed, or it would have been contested at the time. Now the IRS is trying to collect back income taxes from the amount filed on the 1099C.

1) Is the 1099C the creditor filed legal?
2) Do I really owe back taxes on a debt that was already paid,in full?
3) What options do I have?

Alessandro said...

A lovely piece of info!

Alessandro said...

Great work, keep it up.....

Alex said...

Excellent info, I liked it.

Matthew Burke said...

this article is entireley misleading. what the author fails to point out is that if the taxpayer is insolvent at the time the debt is discharged (i.e. at the time the creditor writes off part of the debt), calculated by having his liabilities exceed his assets, then the discharge of indebtedness . If a taxpayer is NOT insolvent, then he technically has assets to draw down on to pay this debt off. The other exception is if the taxpayer files bankruptcy. Those forgiven debts do not give rise to ordinary income either.

Matthew Burke said...

Yes, 1099c, if you send a debtor a 1099c then you have legally forgiven that portion of the debt, and that portion of the debt NO LONGER EXISTS, therefore you cannot collect on it.

to anonymous 3:38, if a debt purchaser buys a $20,000 credit card debt for $1,000, the face value of the debt is still $20,000. its value of $1,000 simply reflects the relative value of the debt because it isn't considered very collectible. but that doesn't change the fact that the face value of the debt, and the amount that they could legally sue for and collect on is the full $20K. They may have a gain tax wise and economically, but the debtor still has had discharge of indebtedness income, i.e., economically he is still $15,000 ahead of the game economically. seems unfair, but that's how it works out economically and tax theory wise.

Anonymous said...

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Allied Interstate is one of the worst imaginable collection agencies. And these consumer reviews speak volumes.

Anonymous said...

While it’s true that cancelled debt is generally taxable income, my understanding is that there’s an exception if the debtor is insolvent (i.e., liabilities exceed assets). I’d expect that many of the folks who have debts cancelled fall into this category.

Anonymous said...

I need clarification. If I filed bankruptcy and it was discharged do I owe taxes on the amount that was discharged? I surrendered two homes and much CC debt and this was never brought up with my attorney.

Lindsay said...

I have a question: My ex racked up significant debt on a credit card (that I was unaware of at the time that had both of our names on it) after we split up. Of course, he quit paying and the creditor came after me. I settled the debt with the creditor for half of what it originally was. I then got a judgement against my ex for the settled amount. Now, the creditor is sending me a 1099-c for the fogiven amount. How do I make this my ex's responsibility to pay the tax rather than me? Does the judgement help? Your response is appreciated. Thanks.

Lindsay said...

I have a question: My ex racked up significant debt on a credit card (that I was unaware of at the time that had both of our names on it) after we split up. Of course, he quit paying and the creditor came after me. I settled the debt with the creditor for half of what it originally was. I then got a judgement against my ex for the settled amount. Now, the creditor is sending me a 1099-c for the fogiven amount. How do I make this my ex's responsibility to pay the tax rather than me? Does the judgement help? Your response is appreciated. Thanks.

Lindsay said...

Sorry I forgot to leave my email:
lhowell1226@hotmail.com

Thank you so much for your response, your blog is very much appreciated.

Joy said...

I have some credit card debt in my name as well as in my husbands that I'm trying to get settled at 85% before the end of the year. My husband will begin collecting his social security in 2008 and I'm afraid that a 1099C issuance in 2008 could affect his benefits.

Am I correct in this assumption? Is the income looked at differently on a 1099C than a W-2? I just don't want to take any chances with his benefits.

Thank you.

Anonymous said...

You do not have to pay the taxes on a 1099c if you filed bankruptcy or you are insolvent, meaning your debts and more than you assets. You will need to send the irs a letter of insolvency (Sample Below). If you are contacted by the IRS, respond in a timely manner, or you will be taxed and penalized for the 1099c.

If the 1099c issuer places a fraudulent amount on the 1099c, the IRS will rarely go after that collection company. Report it anyway to the IRS enforcement.

You best course of action is to file a civil suit against the collection company for fraud and deceptive business practices. In most states you can collect actual damages, attorney fees, court cost, and punitive damages up to 3 times the amount you were defrauded. Most of these companies are required to post a bond with the state, which makes them attactive to collect judgments.

It is important you keep all statement and correspondance from these companies. Also get a copy of your credit report every year.

==============
Sample Letter to the IRS regarding 1099C

(Your Address)
(City, State ZIP)
(Date)

Internal Revenue Service
(IRS’s Address)
(City, State ZIP)

Re: (Your Name and Social Security Number) .

I received a 1099-C form for the tax year (the year which you got the 1099-C for) from
(Name of creditor company or bank) in the amount of $ (fill in the amount listed on the 1099-C).

My debt to (Name of creditor company or bank) was a (Type of debt such as credit card, personal
loan, deficiency balance on repossessed car) that I was unable to pay off.

This charged off or cancelled debt is taxable income, unless
one of the five exceptions applies. I believe my case qualifies for the following common exception :

(Check one of the following boxes, depending on your situation.)

( ) Insolvency - My liabilities (money I owed, including the amount on the 1099-C) were greater than
my assets (all of the money and property I owned) at the time the debt was forgiven. An itemized list of my
liabilities and assets at that time is attached for your information.

( ) Bankruptcy - The obligation to pay the debt to (Name of creditor company or bank)
was discharged in bankruptcy case number (Fill in your case number here). For your information,
I have attached a copy of the page from my bankruptcy schedule where I listed the debt to this creditor, and
the notice “Discharge of Debtor in a Chapter 7 Case”.
Because the above exception applies, I have not included the amount reported on the 1099-C on my tax
return.

Thank you.

Very Truly yours,
(Sign your name and print your name under your signature)

Attachments:(Check one of the following boxes to explain what you are including with this letter.)

( ) Statement of liabilities and assets

OR

( ) “Schedule F” AND “Discharge of Debtor in Chapter 7 Case.”

Anonymous said...

So if they collector files the 1099-c and they can no longer collect how do I get that off my credit report

Anonymous said...

My original credit card debt was sold to a collection agency.

I informed the collection agency that i disputed a portion of the amount showing owed, but that i would pay the undisputed amount.

They agreed to accept the undisputed amount as payment in full.

My question is, who normally sends the 1099-C in cases where the debt is sold off? the credit card company or the collection agency?

This is important because i'm worried that the collection agency agreement might not bind the credit card company from sending the 1099-C anyway.

Thanks.

Anonymous said...

Two 1099-C's were sent to my mother's home in my father's name, who passed away in 2006. They were credit cards/loans HE had - only in his name. I am doing her taxes, as she suffered a stroke and cannot do them. How do I handle this? He is deceased, they were his accounts, not hers, she is not legally responsible for his accounts. Do I include them, incluide his name saying he is deceased? Not include them? I do not know what to do. Thank you!

cmclean said...

I have a contested lawyer bill for a child custody case. My wife owner a child care facility and the lawyer's grandchildren went there and she provided legal services. She got mad a later issued a bill and then a 1099-c after I contested the bill. Is this legal? What can I do? In Texas

Anita said...

my husband just got a call saying that they are putting a 1099 on him for a car that got repo about 5 months ago we dont know what to do they want to take 1 paycheck a month to cover the cost and all his taxes when he files next year until it is all payed off. is this possible even if we live paycheck after paycheck? we cant affored to do that is it better to claim bankrut? please someone help????

Anita said...

my husband just got a call saying that they are putting a 1099 on him for a car that got repo about 5 months ago we dont know what to do they want to take 1 paycheck a month to cover the cost and all his taxes when he files next year until it is all payed off. is this possible even if we live paycheck after paycheck? we cant affored to do that is it better to claim bankrut? please someone help????

Anonymous said...

I'm still a little cofused....
My scenerio, In 2005, a credit card company filed a 1099C on me for the full amount of my credit card debt, and I have already paid the tax. Now, 3 years later, a collector is trying to collect on the debt plus tons of interest. Am I still liable for this debt if I already paid the 1099C tax and/or is there a statute on the collection of this debt?
Thank you much!

Anonymous said...

Do I still have to pay a credit card debt if I already paid the 1099C tax on the entire debt?

Anonymous said...

Thanks for all of the info on 1099C. I had a car that was voluntarily reposessed in 1996. Two weeks ago I received a call from a debt collector demanding payment. This was the first time I have received ANY correspondence about a balance due (I know it seems hard to believe). The debt collector followed up his phone call with a letter as required and I responded. My response spelled out that I wanted no further calls, that I disputed the debt and I pointed out several vilations of the FDCPA. They responded with a letter saying only that they would prepare a 1099C.
My questions are:
Since the debt is disputed can the 1099C be enforced?
Since I was never given notice of the debt can they actually include additional amounts in the balance (principal, interest, "other fees")?
What about the statute of limitations?
If I had paid it (I didn't because I never knew about it) I wouldn't still have records given that it is almost 13 years old.

It seems there is a big loophole here since I could claim that anyone owes me an amount of money and if they don't pay I forgive the debt and file a 1099C forcing them to pay taxes on it.

Help?!?!

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Anonymous said...

We have considerable debt and had planned to file bankruptcy, but put it off hoping for improvements. It was my understanding that the creditors would be sending me the 1099-C's in the mail during January, but to date I have received nothing from them, except the usual collection notices. Note that on my credit report reflects each debt has been written off as bad debt.

Question: Are they required to mail the 1099-C to me as well as the IRS, and is their anything special (pitfalls) I should know about regarding 1099-C's not sent, or reported?

J said...

Please help... Both my ex and myself received a 1099-c for 2009. It isn't either of our primary residance and the property and loan is in both are names. The amount is for 57,xxx. I think I claim it all on my taxes but then I claim 1/2 as an expence? Is there another IRS form that I should fill out and send my ex??

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Anonymous said...

My boyfriend has an email from an attorney where he paid in full a credit card bill in 2008, the credit card company reported it to the IRS in 2009. They stated to him that it posted on thier account in Feb., but the CASHIERS CHECK was received and acknowledged as "account paid in full" on 12/29/2008. When does he LEGALLY have to report it? 2008 or 2009?

marc said...

I have a scenario You may be able to help me with...

I just received a CP2000 form for a cancellation of debt for $5k from citibank.
I had no record of any debt cancellation from them so obviously it was not reported on my taxes.
I did not have that amount available in assets at that time. I was renting and had no car at the time(not in my name).
Now when I ran the debt up, I was single, but when the debt was cancelled I was married.

Can anyone point me in the right direction?

I appreciate any help I can get.

TX Veteran said...

My non-federal debt (7-12 years old) keeps popping up - please help. Details Below....

ISSUE: IRS sent me a CP2000, stating USAA "charged off" i.e., cancelled a $7,500 CC debt.

-The debt is roughly 6-9 years old - I'm not sure how this is officially determined or how the extremely multitude of years ago this occurred interacts. Ideas?
-I don't have any statements or history of records
-I haven't engaged in any type of business with USAA since roughly 2005, at the latest '08.
-I was unaware of this debt, USAA didn't send me a 1099, etc...(IRS letter states that I must use my own records, which I don't have).

The IRS and SkyBlueCredit told me to contact USAA's (debt collection department)
I don't know what information to tell them/request, etc...? Ideas?
I don't know what rights I have when calling

Debt occurred while I was SINGLE.
Debt cancellation (Per CP2000 is 2012) - I was MARRIED.

I'm sick of getting manipulated by companies and double charged and lawyer collection fees for people I've never seen - please help.

-Disabled Texas Veteran

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