If you have had a debt settled for less than the total balance, you may receive a 1099-C.  You may or may not have to pay any additional tax.

When you settle a debt for less than the full balance due, and this is for $600 or more, the creditor or debt collector may report this to the Internal Revenue Service.  I say "may report" because they don't always report a settled or "forgiven" debt. 

Over the past decade that we have been helping people get out of debt, it seems that in the last year or so, more and more creditors and/or debt collectors are reporting settled or forgiven debt.

I have to start out by stating that I am not a CPA or licensed professional tax consultant, so any advice here should only be used to help point you in the right direction.  If you do receive a 1099-C, please seek the help of a professional tax consultant!

So what should you do if you receive a 1099-C?

                             DON'T IGNORE IT!!!!

Let's say that you had a Credit Card that had a balance of $10,000 and because of circumstances beyond your control, you just couldn't make the minimum payments.

Most likely, this account was sent to a collection agency after the original creditor made numerous attempts, such as annoying and often harassing phone calls and many collection letters.

The debt collector may have sent you an offer to settle for less than the full amount due or perhaps you or a Debt Settlement Company were able to negotiate a good settlement.

Using our $10,000 example, let's say that the settlement was for $4,000.  The debt collector was willing to "forgive" (in IRS lingo) $6,000.  The debt collector reports this to the IRS in order to write that amount off as a loss and you are sent an IRS form 1099-C.

At first glance, it may look like you owe $6,000 of additional tax, but this is not so!

You will need to file the proper forms with your tax return to have the settled or forgiven amount EXCLUDED from being added back in as additional taxable income.

As usual, the IRS seems to have complicated the process, but in reality, it is not that difficult to file properly.

The basic and most important question that you must answer and prove to the IRS is:

"At the time of the settlement or forgiveness of the debt, were you insolvent?"

What is "insolvent"?

If, AT THE TIME OF THE SETTLEMENT, you had more debt than you had in assets, then you were insolvent. (Sounds terrible, but that's just their terminology.)

So, how do you find out or prove if you were insolvent or not?

It is really not difficult.  Take a piece of paper (or use your computer if you want) and one side list all of your assets, such as:

• Net equity of your home (Current value less amount you owe = net equity)
• Cash or money in the bank
• Net DEPRECIATED value of things such as furniture, appliances, tools, etc.  remember, even though you paid $2,000 for that refrigerator a few years ago, today it probably would sell for only $200-$300!
• Net value of your autos, boats, campers, etc.  Same thing, NET, DEPRECIATED VALUE!

Total all of these up.

On the other side of your sheet, list all of your DEBTS OR LIABILITIES, such as:

Since you've used the NET VALUE (Depreciated Value less Balance still due) on the ASSET SIDE, were probably talking about:

• Credit cards
• Store cards
• Student loans
• Medical Bills
• Personal loans
• Possibly Home Equity loan or 2nd you forgot to list before!

Add all of these up.

Subtract the total of all of your LIABILITIES (DEBTS) from your NET ASSETS. Which is greater?  If your Liabilities are greater than your Net Assets, you were insolvent at the time of settlement and therefore, the amount forgiven WILL NOT be included as taxable income.

The next part seems a little difficult, but it's not.

You are going to complete:

• IRS Form 982
• A copy of your ASSETS VS. LIABILITIES worksheet
• A copy of the 1099-C

You are going include these along with your normal tax return.  By the way, don't be surprised if your tax preparer seems a little confused as to how to handle a 1099-C.  I've had clients pay tax that they didn't need to because the tax preparer didn't file the proper forms.

We have prepared a FREE 1099-C PACKET that you can download and use. 

It includes:

• Instructions
• Examples
• IRS Forms

Get yours by clicking on the button below:

You are going to need the help of a qualified, tax consultant or preparer.  You still should be able to exclude a large percentage of the forgiven debt, but there may be other ramifications, so I advise you to get help.

Photo credit: www.lendingmemo.com

If you had a debt settled or "forgiven" in IRS lingo, and it was for more that $600, you most likely will receive a 1099-C.  But, you may not be required to pay additional tax on the forgiven amount, but YOU MUST FILE THE CORRECT FORMS AND DOCUMENTATION. 

We have prepared a simple, easy-to-use instruction packet for you. 

Get yours now:

Receiving an IRS Form 1099-C is a little scary, but if you look closely at the form, you will see something like this:

"...do not include canceled debts in your income to the extent you were insolvent immediately before the cancellation of the debt.  If you exclude a canceled debt from your income, file Form 982."

OK, now what?

First, at the time of settlement (most likely last year), were you INSOLVENT?

According to the IRS, "insolvent" means that your debts (all liabilities, not just this settled debt) were greater than your assets (net worth).

You'll need a simple, Basic Financial Worksheet:

You will list all of your assets, net value of your home, autos, etc.  Most people who have have debts settled would have had little if any equity in their home and/or auto. 

You most likely have little or no savings, hence the financial hardship that helped lead to using DEBT SETTLEMENT to eliminate your debts!

Once you have completed the Financial Worksheet, if your LIABILITES were greater than your ASSETS at the time of the settlement, then you were 'INSOLVENT".

NEXT...COMPLETE IRS FORM 982

We have included Form 982 with the FREE 1099-C PACKET.  If you haven't requested the FREE DOWNLOAD, click on the button above.

Follow the instructions to compete the Form 982. It's so simple.

It is a good idea to include a short explanation of your financial situation.

Just a brief note (can be handwritten, but make it legible).

So now you should have completed:

• Financial Worksheet showing your were insolvent at the time of the debt forgiveness
• Form 982
• Brief note of your financial circumstances at the time

Make a copy for your records and then send all of the above along with your tax return to the  IRS.  You should send via Priority Mail so that you will have proof that the IRS received it, but don't ask for a signature, as this may delay the process.  You can track delivery online.

Don't be surprised if your accountant and/or tax preparer is not aware or does not know how to complete the Form 982.  Just download and print the FREE 1099-C Packet for them.

If you have alreadly filed your tax return and before you received the 1099-C, you will need to file an amended form along with the 982 and other documents.  You should probably seek the help of a qualified tax specialist for this.

Hope this helps! 

Have you had a debt settled for less than you owe?  If so, chances are pretty good that you also received a 1099-C for the amount of the "forgiven" debt amount.  WHAT?  How can that be possible? 

Unfortunately, if you settle your debts, the forgiven amount is considered taxable income.  However, you don't necessarily have to included it as taxable income.  Read on to hear Bob's story and how he was able to avoid paying taxes on his forgiven debt.

How to avoid paying taxes if you receive a 1099-C for FORGIVEN DEBT

Bob lost his job and started using several credit cards to make ends meet. He was paying for groceries, gas, and even had to take a cash advance once in a while to survive.Bob had every intention of paying off the cards, but due to our country's severe economic downturn, he could not find a job.

After about a year or so, he had added another $10,000 to his cards, making the total of all his credit cards to be about $22,000!The minimum payments on all of them totaled a little over $500 per month and he just couldn't meet his obligation.  After 3-4 months of non payment, most of his cards went into collections, debt collectors started

Bob had heard about DEBT SETTLEMENT and DEBT MANAGEMENT, but didn't know if he qualified.

After a FREE COUNSULING SESSION, it was clear that he could not qualify for the Debt Management Program and therefore chose to enroll in the Debt Settlement Program.

Let's see what happened during the Debt Settlement Program:

After searching the net and talking with several companies, Bob had chosen a reputable Debt Settlement Company to help him settle his debts.

His total debt was settled at an average of 40% of what he owed, so his creditors FORGAVE about $13,000 of debt.

Because the amount of the forgiven debt was over $600, Bob's creditor reported the settlement to the IRS and mailed him a 1099-C.  The 1099-C basically said that $13,000 had been forgiven and he needed to report that amount as additional income for the taxt year the forgiveness was granted.

But his Debt Settlement Company helped him understand that he was not going to be liable for the additional income and resulting tax on that income.

They provided him with a information about how to file IRS Form 982 and the other documents he needed to provide with his taxes.

IRS Form 4681, says that if, at the time of forgiveness, you were INSOLVENT (meaning your liabilities were greater than your assets), then the forgiven amount DID NOT HAVE TO BE INCLUDED as additional income!

Since Bob had completed an Asset vs. Liabilities worksheet, provided by his Debt Settlement Company, he was able to completely avoid any additional tax on the settlement or "forgiven" debt shown on the 1099-C!

If you have received a 1099-C and need help, we can help, please let us know!

If you have settled a debt or had a debt, you may receive an IRS Form 1099-C.  This doesn't necessarily mean that you will have to pay additional tax on the amount "forgiven".  Here's what you need to do:

You received this form because a Federal Government agency or an applicable financial entity (a lender) has discharged (canceled or forgiven) a debt you owed, or because an identifiable event has occurred that either is or is deemed to be a discharge of a debt of $600 or more.  If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less that $600, on the "Other income" line on your Form 1040.

However, YOU MAY NOT HAVE TO INCLUDE ALL OF THE CANCELED DEBT IN YOUR INCOME (capitalization mine!).  There are EXCEPTIONS AND EXCLUSIONS, such as BANKRUPTCY or INSOLVENCY see Pub. 4681...for more details.

Most people who have had debts settled (forgiven) have gone through a very hard time, financially. And, most people who have had debts settled would fall into the catagory of INSOLVENCY, according to the IRS and several publications.

The bottom line is, if AT THE TIME OF SETTLEMENT your liabilites were greater than your assets, you were insolvent and therefore the amount of debt forgiven would be excluded.

We have helped hunderds of our clients to become DEBT FREE through DEBT SETTLEMENT, but we also have assisted them in AVOIDING (or paying very little) ADDITIONAL TAX after receiving a 1099-C.

We have put together a complete 1099-C Kit that will show you (and/or your tax preparer) how to fill out and file the proper forms.

CLICK HERE to get you FREE 1099-C KIT

If you have received a 1099-C, DON'T PAY THE ADDITIONAL TAX until you know your rights!

If you or a debt settlement company negotiated a debt for less than the balance due and if that amount was more than $600, you most likely will receive a 1099-C.

NOW WHAT?

The 1099-C looks like you will have to pay 100% of the settled or forgiven amount, but this is simply NOT TRUE!

However, a lot of tax preparers and even CPA's don't understand this law and how exemptions are calculated.

According to IRS Form 4681, there are several exemptions to including forgiven amounts back into taxable income. On page 4 of IRS Form 4681, there is an explanation of "INSOLVENCY". 

Basically the rule states:

If at the time of the settlement or forgiveness you were INSOLVENT, then the amount of the forgiveness IS NOT INCLUDED as additional taxable income.

How do you determine if you were insolvent?

At the time of the settlement, you need to show that your liabilities were only equal to or greater than your assets.

You need to complete a basic budget showing all of your income, outgo, and assets:

• Equity in your home
• Net value of your automobile(s), boat, etc.
• Net value of jewelery, stocks, bonds, etc.
• Savings or investment accounts
• Net furniture value, coin collections, etc.

For most people who have negotiated a settlement of their credit card or cards, they usually do not have any real assets and therefore the amount forgiven is not included as additional taxable income.

You will need to complete IRS Form 982. You will check a couple of boxes and sign, and along with the Budget Worksheet, turn in with the 1099-C and your normal tax return.

Once again, don't be surprised if your tax preparer or accountant is not really up on this procedure! You might want to download IRS 4681 for them to review.

If you have already filed your taxes for the last two years and if you paid additional tax on the additional income added back into your adjusted gross income, you should file an AMENDED RETURN.

If you are still unsure of what or how to deal with a 1099-C, please let us help.

We have helped dozens of tax preparers and accountants deal with the 1099-C issue and would be glad to assist.

Got Questions? We've got ANSWERS!

877-492-4109

We get dozens of calls each year around tax time asking about the 1099-C IRS form.

If in the last taxable year you or a Debt Settlement Company had negotiated a settlement on one of your unsecured accounts, you will most likely receive a 1099-C form if the amount was over $600.

Unfortunately, many tax preparers don't know how to have settled or forgiven amount excluded from taxable income.

The most important question is:

"At the time of forgiveness (IRS term for settlement), were you INSOLVENT?"

What is INSOLVENT?

In IRS Form 4681, it gives the typical, a little hard to understand explanation of what the IRS deems INSOLVENCY to mean.

Basically, if your total assets are less or equal to your total liabilities, then you were INSOLVENT at the time of forgiveness and therefore the forgiven amount is excluded from additional taxable income.

What do you need to do?

List all of your assets:

• Equity in your home
• Equity in you car or cars
• Cash in the bank or retirement accounts
• Net value of any other property (rental, furniture, jewelry, collections, etc.)

List all of your liabilities:

• mortgage you still owe (maybe a 2nd as well)
• Amount you still owe on your car or cars
• All of your unsecured debt (including the final balance of the debt forgiven.
• All loans, student loans, medical bills outstanding, etc.

Subtract the total liabilities from total assets.

If you are equal or negative, then you were INSOLVENT at the time of the settlement or forgiveness and therefore the amount WILL NOT BE INCLUDED AS TAXABLE INCOME.

When you mail your tax form, you will include:

• A brief (brief) statement that you were INSOLVENT at the time of the settlement and that this amount should be excluded from taxable income.
• Copy of your Assets vs. Liabilities
• IRS Form 982

You can get a copy of IRS Form 982 by clicking here.

Put your name and Social Security number in the boxes at the top.

Check the box in Part 1, 1-b that states, Discharge of indetedness to the extent insolvent (not in a title 11 case).

That should do it.

If you would like more information about the IRS's definition of INSOLVENTCY, see IRS Form 4681, page 5.

If you feel overwhelmed and need some FREE ADVICE, or you need more help with the 1099-C, please click on our FREE DEBT SUMMARY link.

 photo by: Horia Varlan

If you or a debt management company has successfully negotiated a settlement of your credit card debt, and the amount is over $600, you may receive a 1099-C.

It basically states that unless the amount forgiven (IRS terminology for settlement) is exempt, then it has to be included as additional income subject to normal taxation. 

So, how do you determine if the forgiven amount is exempt?

According to IRS Form 4681, there are several exemptions to including forgiven amounts back into taxable income.

For the purpose of this article, let's focus on the settlement or forgiveness of credit card or unsecured debt.

On page 4 of IRS Form 4681, there is an explanation of  "INSOLVENCY".  As usual, the government has a hard time explaining the rules (I think they do it on purpose!), but basically the rule states:

If at the time of the settlement or forgiveness you were INSOLVENT, then the amount of the forgiveness IS NOT INCLUDED as additional taxable income.

How do you determine if you were insolvent?

At the time of the settlement, you need to show that your liabilities were only equal to or greater than your assets.

You need to complete a basic budget showing all of your income, outgo, and assets:

• Equity in your home
• Net value of your automobile(s), boat, etc.
• Net value of jewelery, stocks, bonds, etc.
• Savings or investment accounts
• Net furniture value, coin collections, etc.

For most people who have negotiated a settlement of their credit card or cards, they usually do not have any real assets and therefore the amount forgiven is not included as additional taxable income.

You will need to complete IRS Form 982.  You will check a couple of boxes and sign, and along with the Budget Worksheet, turn in with the 1099-C and your normal tax return.

Don't be surprised if your tax preparer or accountant is not really up on this procedure!  You might want to download IRS 4681 for their review.

We have helped dozens of tax preparers and accountants deal with the 1099-C issue and would be glad to assist.

Got Questions? We've got ANSWERS!

877-492-4109

photo by: alancleaver_2000