Yesterday, MMI was one of nine organizations that participated in an all day call-in event called Your Money Marathon. The calls came in at a rate of about 1,000 an hour. By the end of they day, we had received an astonishing 14,000 phone calls.
I personally answered calls by concerned consumers. By noon, it was clear that there were some very common concerns. I am going to address one of these concerns each day over the next few days. Today, I will talk about settlements. I have written about the pros and cons of debt settlement in the past, so I am going to address one specific settlement issue as expressed by a woman from Aurora, Colorado.
Question: We found ourselves about $20,000 in debt to credit cards. Not wanting to go bankrupt, I made deals to pay the credit card companies 40 cents on the dollar. Now I am hearing that the credit card companies will issue 1099 forms for the debt forgiven. Is that true? I was never told about this. I will be forced to file for bankruptcy!
Answer: IRS Publication 982 states if a debt is cancelled or forgiven and a debtor receives a Form 1099-C, Cancellation of Debt, the debtor generally must include the cancelled amount in gross income for tax purposes.
There are several exceptions from the inclusion of cancelled debt in income. One of the exceptions in having to include this debt as income is if you are insolvent. You are insolvent when your liabilities exceed the fair market value of your assets. If you wish to claim the insolvency exclusion, you will need to fill out and include with your tax return, Form 982 "Reduction of Tax Attributes Due to Discharge of Indebtedness."
If you have questions about whether or not you will have to pay taxes on a forgiven debt, please seek the services of an accountant familiar with tax law. You can also find a lot of tax information at IRS.gov.