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1099, negotiations vs BK

Date: Wed, 12/23/2009 - 09:37

Submitted by Badabing
on Wed, 12/23/2009 - 09:37

Posts: 58 Credits: [Donate]

Total Replies: 10


I have been and am in the process of evaluating my option to regain my freedom for what I consider a large amount of unsecured debt.

Thee debts are business related so “if” business were good I would pay them off through the business and as such would be paid with pre-tax dollars.

However, since these debts are in my name, if I negotiate them down the creditors will report them, as they should, to the IRS on form 1099. Reported on a form 1099 = untaxed income which I will now need to pay both SSI or self employment tax plus income tax on.

Lets assume for this exercise I owed $10,000. during the period where I don’t make payments (say 6 months) the CC company charges me 29.99% (slightly less the the average blood sucker rate they can charge of 39.99% 10,000 for 6 months, compounded monthly = $1596 in added interest charges, not counting any new late fees or over limit charges

[SIZE=3]So now entering month 7 as we begin negotiations my outstanding bill is $11,596. [/SIZE]

[SIZE=3]If they offer me 50 cent on the dollar the offer will be $5798 which is actually close to 60% of my pre interest and fees balance. [/SIZE]
[SIZE=3]However they now report to the government on form 1099 that I have added income of $5798. [/SIZE]

Now I owe Uncle Sam 15% of that for SSI or self employment tax or $870
Plus income tax which could range from 10-30 %, lest say 10% or $580

Uncle Sam charges 18% plus penalties if your late giving him his share.

So where are we.

Our original debt was 10,000 settled for 5798 plus Uncle Sam of 870+580 brings our payout to $ 7248 or 72.48% of the debt I couldn’t repay.

Now consider that I owe 2.35 times that amount.

From what I have seen a BK 7 or 13 is not taxed and depending on the situation I could end up paying 10% to nothing of the unsecured debt. Depending on what I learn in a couple weeks BK may be a better option. I know it will be a black make on my credit report but the truth is my credit is shot to bits as it is and with the economy and housing market as it is its gonna be a very long time before I need to make a big ticket purchase.

Just thinking out loud.

Bill


The rule is pretty simple. You get 1099 on forgiven debt in excess of $600. Then must report as ordinary income and pay taxes on it. MY accountant said 30%.

However, if you can prove you are insolvent at time of settlement taxes are forgiven. Insolvent means more Liabilities than assets. Or, you owe more than you have.


lrhall41

Submitted by OZZIE69 on Wed, 12/23/2009 - 10:07

( Posts: 555 | Credits: )