1099c question

Could this be true:

A person calls the original credit card company and asks for a 1099c for the debt he can't pay. Then the 1099c arrives in the mail. The 1009c is filed with the IRS on a tax return. Now, the IRS owns the old written off debt. So, a debt buying company can not sue for this debt, if they find in a pile of old debts they have acquired. And, if the debt buyer has the debt listed on a credit report, they must remove it, because they do not own the debt. So, they can't report it. Besides, now the debt has a zero balance.

First of all, you usually do not just get a 1099c by calling the creditor. A 1099c is reported by the creditor to you and the IRS in cases where all or a portion of the debt has been forgiven through a settlement agreement.

That said, if a 1099c is file, the debt is done...no money is owed or could be sought in the matter of that debt. The IRS does not "own" the debt either. What the 1099c does is report your forgiven debt as income to you, which you are required to pay taxes on. Now, if you fail to pay the taxes on a forgiven debt, you do still owe the IRS, which will pursue it heavily themselves!

One thing to note about 1099c forms...make sure you keep any and all copies of the settlement agreement and cancelled check handy for several years. I had one creditor mis-report the forgiven amount of a debt, and had to appeal to the IRS....the forgiven amount was just less than half the debt, but the creditor reported the full amount to the IRS as forgiven after I paid my agreed settlement amount of $2,500! I worked through a debt repair agency, so I did not have a copy of the actual payment, and I'm still fighting it! I have tried contacting the creditor and the repair agency for the information required to get this corrected, with no luck. I ended up losing most of last year's refund to cover what the IRS said I owed. I could still get it overturned, but at this point it is looking like more work than it is worth! I no longer owe anything to the IRS, and thinking that I should leave it alone as a lesson learned!

1099c are meant for debts which have been either cancelled or forgiven. The IRS defines a number of identifying events which would deem that a debt has been cancelled, namely 1) the unpaid balance in an account that has been "legally settled for less than full balance", or 2) an unpaid balance that has not had any bona fide collection activity on the account for at least 3 years.

You cannot exactly call a creditor and request that a debt be cancelled. If they intend to collect, and they perform collection activity within 3 years, then they don't have to cancel it.

BUT under the IRS instructions, once they debt has been deemed as cancelled, the creditor should be sending you a 1099C. You would then be required to report that amount as income on your tax return in the year that it was cancelled. (Unless you have been adjudged insolvent by means of a bankruptcy proceeding).

When a debt is cancelled and 1099C issued, the IRS is not actually buying the debt and so they do not own it. But I will argue that a cancelled debt cannot be collected on in the future, since it is indeed cancelled. I think that if a debt buyer tries to sue over it, you could raise the fact that it was cancelled as a valid defense in court.

I am not quite sure what the ramifications are in regards to reporting the account to the credit bureau. I think that they may be able to report the fact that you had a delinquent account, and what the balance was that they charged off -- as long as they report a zero current balance.

The only think I know about that form is that if you settle a debt and you save more than 600 dollars it is reported to the IRS as income and you need to report it on your taxes.

Why is this reported as income? Is it actually income? This confuses me! This is my for instance, I owed the original credit card company 4,400, then CACH purchased it for who knows how little! Now suddenly the debt jumps up to 9,400 so i'm trying to settle this now for way less than the 9,400. If they agree to this how does that constitute income? DOesn't seem fair to me or make any sense! Had i recieved any sort of goods for that amount then maybe but for them just to hike it up that high now i'm responsible for taxes on it? WTH?

Ang

I can only guess at this one past what I already know. The reason it is considered income is because it's a debt. It doesn't matter why it is the amount it is, it's just something you are supposed to pay back. So when you "save" more than 600 dollars by paying less than what is owed it is like have what you "saved" as income.

I sure dont' feel like i have saved anything! lol Now if i actually owed this amt then ok but c'mon they can just pull a number out their ... ooppps! and it's considered income???
ha ha
Ang

It's not fair. Especialy in your case with what happened.

Ang, I so understand your frustration there! I remember thinking something similar when I was cleaning up my defaulted debt. Now, I if the settled amount was for less than the original principal minus fees and interest, sure I could understand it. I mean, say I bought $2,500 worth of stuff on a credit card...if I didn't make any payments, and the debt was forgiven for say $2,000, then that was $500 worth of stuff I basically had given to me. I would have no problem counting that as income.

However, all of the debts I settled, I settled for an amount more than what the original credit limit on my account was....meaning, there was no way I was being forgiven any portion I actually spent...I was simply being forgiven fees and interest. I wouldn't have gained anything from this had I not defaulted...this was simply money out of my pocket that would have gone into the bankers' pockets to make them richer. They are simply losing their profit. Why is it considered my income if what the creditor did was simply cut their profit, and agreed to settle for an amount that they could break even on? I mean, if that were the case, then we would have to pay tax on every item we buy that is on sale, right? It is basically the same idea....a store didn't sell all of their summer clothes, and it is now winter. So, to try to at least break even, they put it on sale, and cut their profit. Same thing, right? I don't have to claim on my taxes that I bought $200 worth of clothes for $75?

So why is it my income when the banks basically do the same thing? They can't get the debt paid with all of their junk added to it, so they decide to take a cut in profit to break even, but you pay the taxes on it? The only think I can figure is to counter act that fact that the debt in it's entirety is considered an "asset" to the company. If you owe a bank $5,109 in principle, fees and interest, the bank puts that entire $5,109 on the plus side of their assets. If the account is charged off, the creditor gets a tax break on that...see we are basically covering that tax break.

Of course, I have a problem with this as well. Say I bought my house for $100,000, and sold it a couple of years later for $75,000. Now, I would get a tax break for the $25,000 loss. However, does the buyer have to pay additional tax because of that? No!

So why do we have to pay taxes on the creditors' losses of profit, if we at least pay back an amount equal to what we borrowed in the first place?

Well and to top it off even if the amount were the exact amt i recieved merchandise for haven't i already paid the taxes at time of purchase? Doesnt' seem fair to me also that the cc co gets a tax write off for the loss but we have to pay taxes yet again!
Ang

True...we are taxed when we get the money and when we spend the money. That is, however, the same even if we used cash instead of credit to purchase the same goods.

However, in the case of having to pay taxes on the fees and interest a company decides to forgive an not charge? I guess it would similar to having to pay sales tax on the discounted portion of a good? I mean, the state can't say, "Okay, the MSRP on that sweater is $50, and the store decided to sell it to you for $35; however, we will still require you to pay sales tax on it as a $50 item." I'm sure if that happened, the people would stand up, and some court would find it unconstitutional. So why doesn't that happen with people who have to pay tax on forgiven fees and interest?

After three years is the collector no longer able to cancel the debt?

If you know the debt is yours, and there is no way possible to pay it, can you offer the collector the opportunity to cancel it? It would be easier to pay taxes on the debt, than to pay the debt.

When the 1009c is issued, is it issued for the debt, including all the fees and interest, or just the original amount of the debt?

What percent of tax does tax payer pay, on a 1099c debt? Maybe 25%?

I'm not sure what u mean by "cancel" the debt. Original creditors write off the debt but then sell it to a collectin agency and in turn they try to collect on it. ALso lots of times collectors can also sell the debt to other collectors and after 3 years they will sell it for pennies on the dollar... but they will try to collect on the original amt owed plus interest and fees. (doesn't mean they'll get it but they do try)
Hope this helps a little,
Ang

As Ang said, the original creditor will write off a debt, and sell it to another entity for pennies on the dollar. That entity will make a few futile attempts, and sell it off again. This can go on until the day the debtor dies!

What there is a limit on is how long the creditor has from the time of default to sue you to get a judgment on the defaulted debt. This is the statute of limitations, and varies by state. Many collection agencies are banking on scaring you into a payment plan, because that starts the SOL over again.

The best way to handle things is to always request validation of the debt in writing. With all of the debt selling going on, if you really do want to take care of the debt, and have the fund to do so, you want to make sure that you are dealing with the correct entity, and that the amount they claim is valid.

The best way to handle tax on the debt is to account for the tax in your settlment offers. For example, if you defaulted $5,000 on a credit card and now the balance is $7,500 then you need to account for your tax bracket % rate times $2,500 at a minimum to break even. My high end tax bracket is close to 20% so if I were to settle the worst settlement offer I would accept would be $5,000 - .20 x (2,500) = 4,500. This means you settled for the amount you actually received and spent. In reality I would offer the CA less than that though. I would probably offer them $2,500 - $3,000 as a settlment in full for this example.

Is there any way to settle with the condition that u do not recieve a 1099??
Just curious as i am in the process of settling today.
Ang