The truth about being INSOLVENT...ChrysHenderson please read

never once in your post do you list income.why is that?that is one of the if not the big factor in determining whether or not you are insolvent.after all of the assets are brought out in the open.then they look at your income,are you the head of a household,how many dependents.if someone's income is say 45,000.00 i don't think that qualifies as insolvent.

Canceled debt is not included in gross income if the cancellation takes place in a bankruptcy case under the U.S. Bankruptcy Code, OR if the cancellation takes place WHEN YOU ARE INSOLVENT.

I think the original poster is right on this one. Being insolvent determines your taxable income. Your taxable income does not determine you being insolvent.

The tendency for many who have to, or volonteer to, tackle this topic, is to confuse means testing for chapter 7 with the code section dealing with insolvency. They are totally separate as indicated by the first post in this thread.

The formula is not income-centric. It is liability-centric.
In other words, you owe more than your worth exclusive of income.

I realize this has been hard for people to grasp. I attribute that to not speaking direct to a tax professional who knows how the code section is applied. Some tax professionals themselves dont know how it is applied and will say it only applies to a BK. They are wrong and you are talking to the wrong person if they answer this way.

I do not know if the insolvency calculations shown above are correct or not but it does not make sense to me that the calculation would not take in to account income. What if the person above makes a large annual income? I could understand the calculation if their income was just barley enough to cover their monthly bills but what if that person makes six figure money. Someone could easily waste all of their money even in the six figure range on items that would not go into that calculation thus they would appear insolvent when in reality they would not be.

Nothing personal here, but this topic is a very real concern for people. It will truly have an impact on their decision making process and their bottom line as well. Board moderators and participants with mucho posts and really good comments on other topics are looked to as an authority whether they like it or not and yet, they are responding to this topic without having any background, knowledge or research. This ultimately hurts the people coming here for help and answers. May I suggest the necessary detail be researched fully by someone in a position to do so and it be posted as a sticky for future particpants. There is far too much misinformation on this issue on the net and feeding into it does this whole board a disservice. Nascar made a reference to an enrolled agent on the other thread. That would be a good place to start.

Further; Check with a tax professional as it relates to this code section and how it applies to you. If they answer with something like "This does not apply to you because you were/are not in a BK process" advise them to do their research and get back to you or seek out competent advice.

Here are some links to some articles that better explain " insolvent ". One if written By Charles Phelan who has worked in the settlement industry for years. This other article better explains the whole process of debt settlement, income taxes and being insolvent.

I don't know why everyone is making this so confusing. It doesn't have to be. Income has NOTHING to do with being insolvent. If you have more debt than assets, you are insolvent. Period. And yes you can be insolvent without claiming bankruptcy.

Can anyone who has already been through debt settlement and claimed to be insolvent on their taxes comment on this subject?

I agree, the definition of insolvent doesn't have anything to do with your income. It just means you have a negative net worth. It is akin to the bottom line on a company's balance sheet. If you were to die today, your assets would not cover your liabilities.

Theoretically, if you had a lot of income, you shouldn't remain insolvent for very long, because you should be saving some (and your savings would be an asset). But even if you make $150K per year, if your expenses are $149K, then when all is said and done you've only increased your assets by $1K.

Wow,

Thanks for the tax lesson. That was very informative.

I find it fascinating that the IRS itself estimates the time needed to fill out the exemption form as nearly 11 HOURS(!) while the "IRS phone support rep" (in the Debt Free Destiny link article above) states that a "simple spreadsheet ... will suffice". Now THAT's what I call "making this so confusing"!

I wonder how many debt settlement companies are informing their clients about this?

chrys

I claimed insolvent this year. I gave my accountant the heads up and he researched it before doing my taxes. I gave him a sheet with my assests and liabilites to show a negative net worth that did not include income. Check out the links that Mobile0311 has they are informative. BTW Charles Phalen does know his stuff he is the owner of zip dept. That's how I learned about claiming insolvent.

I am filing "insolvent" for 2008 taxes for settled credit card debt and I am not and will not file for bankruptcy. This was the advice of my tax guy. He has done my taxes for years and I trust that he knows what he is doing. Don't let that stop you from settling debt. For me is was the only sensible option.

The insolvency issue only involves the assets you own vs. the debt you owe. The only income that would count is the amount you might have saved in the bank. So, if you are saving money to pay credit cards, that money would be counted. It is no different than a business building a balance sheet. If your assets are less than the debt you owe, you are insolvent (in business that is called negative net worth). If you were a business, your income would be put on a profit and loss statement. Keep in mind that your income is offset by the bills you are paying.

I am so glad to have found this thread, it is a major concern for me but now I am confident that I considered to be insolvent. I will check with a friend who is a tax attorney to be sure though.

If you do even the most basic research for the definition of insolvent you will find that it has nothing to do with your income. That is is the whole purpose of insolvency; to determine whether or not the forgiven debt is considered by the government as income or not. This website has some great information but do your own research people! Sometimes I think there are people on this site whose only purpose is to try to discourage people from entering into a debt settlement action plan. My only question is why?

I am in a debt settlement program and it has done very well for me. But I knew what to expect. I have found that most of the complaints about debt settlement are from people that just blindly entered into it, thinking it was a quick fix, without doing their homework. It's still a rocky road, but for some reason they assumed that everything would be fast and easy and their problems would be gone overnight. When it turns out to not be the case, they blame everyone but themselves for not fully researching the process ahead of time.

Being taxed on forgiven income, the 1099's, insolvency, all of it - is part of settling. I just can't believe the number of people who started the settlement process, either on their own or with a company, who weren't aware of this aspect of it. I believe that most people on this site, who truly are in financial difficulty and looking for a way to get their lives back on track, are doing a good job of asking questions and researching the process. You have to READ, READ, READ before you jump in with both feet.

I want to be sure of something about calculating my liabilites:

I owed a CC company $23,000. I paid about $13,000, leaving $10,000 that the company erased due to debt settlement.

Do I include that $10,000 in my liabilities when I am comparing assets vs. liabilities? Thanks

I received 5 1099 C in 2008. I settle a lot fo debt. These are all under my name. I'm filing my tax jointly with my spouse. When calculating insolvency, do I need to include his assets? Debts are all under my name only, due to bad business. I'm sure if I'm calcuting insolvency under my name only, I should be OK, but once I add his assets (savings., 401K), then I will have a problem. Any help? Or would it be better for me to file separately? We have our house under both names, and 2 kids.

Hi Confused2009,

We are talking about the IRS here. Confusion is its middle name!

This is a challenging case, for sure. Yes, you can file as "Married, filing separately". I would definitely hire a tax attorney (get a reference from the IRS itself).

The reason that the IRS estimates that Form 982 (the "Reduction of Tax Attributes Due to Discharge of Indebtedness" form) will take so long is that you have to list *all* of your assets. If you live in a state that determines all property is common, then you would have to list 50% of all your assets. According to IRS Publication 4681 "Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals)" (page 4) you are insolvent just before the cancellation to the extent that the total of all your liabilities exceeded the fair market value (FMV) of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include the entire amount of unsecured debts, and the amount of secured debt that is not in excess of the FMV of the property that is security for the debt.

Then you take the difference between the two and that is the amount you can exclude.

Definitely not a cakewalk, for sure.

chrys

Thank you Chrys. So, you are saying that I should be able to file jointly, and when listing all my assets for Form 982, just list everything that has my name on it. For example, ourhouse (50%), but I do not need to include my husband 401K, or savings or other asset which he has under his name only?

This should explain this topic and all the confussion these examples are copied from IRS publication 4681

There is no word about income and as many already said it has noting to do what your income is, your saving YES it is asset, your 401k yes it is asset, anything that has any value you own is asset and needs to be included

--------------------------------------------------

How to report the insolvency exclusion. To show that you were insolvent and that you are excluding canceled debt from income to the extent you were insolvent immediately before the cancellation, attach Form 982 to your federal income tax return and check the box on line 1b. On line 2, include the smaller of the amount of the debt canceled or the amount by which you were insolvent immediately before the cancellatotion. You must also reduce your tax attributes in Part II of Form 982 as explained under Redution of Tax Attributes, later.

Example 1.
In 2007, Greg was released from his obligation to pay his personal credit card debt in the amount of $5,000. Greg received a 2007 Form 1099-C from his credit card lender showing canceled debt of $5,000 in box 2. The FMV of Greg???s total assets immediately before the cancellation was $7,000 and his total liabilities were $15,000. This means that immediately before the cancellation, Greg was insollowing to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets).Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt canceled, Greg can exclude the entire $5,000 canceled debt from income.

When completing his tax return, Greg checks the box on line 1b of Form 982 and enters $5,000 on line 2. Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Greg does not include any of the $5,000 canceled debt on line 21 of his Form 1040. None of the canceled debt is included in his income.

Example 2.
Assume the same facts as in Example 1 except that the FMV of Greg???s total assets immediately before the cancellation was $7,000 and his total liabilities were $10,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.
Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exception or exclusion applies).

Confused,

You should definitely check with a tax spec-ialist on that one just to be sure. I know you can file separately even though you are married but as far as what assets would be considered just his, just yours, or the both of yours depends on your particular State. Some states automatically divide everything between you two.

Plus, determining a FMV that is acceptable to the IRS could be tricky too (again, note that the IRS itself estimates a time investment of 11 hours to fill out this form). And then the other issue is the way you file. If you normally file jointly, and then next year and on you also file jointly, the IRS may decide that you are filing separately in order to evade taxes and may audit you. So, definitely get a professional, but don't go to H&R Block. If you want to know why, just Google "H&R Block complaint".

Hope this helps and I'm glad you are here. BTW, how did you settle your debts? On your own? Through a 3rd party?

chrys

Thank you Chrys. I settled my own. First I went with James Lombardo, who then disappeared and took $13,000 of my hard earned money. (lot of topic about him in here too)He only settled one card for me. Then I had to do it myself. I managed to settled all my cards with at least 40% less than the actual amount owed. My total 1099-C is closed to $60K! That's why I'm hoping to be able to file 982 insolvency.

Re: Lombardo. WOW :shock: That is really unfortunate. Did you file a complaint with the FTC and your State Attorney General? If not, do so immediately.

I did this on my 2008 taxes. Sent it in to the irs and received my refund check. It is true.

Hi all,
I am currently about to begin the process of a short sale, I understand the tax liabilities and how to assess whether or not I am insovlent. Now it was stated previously in this thread that you calculate the insolvency on the day of the cancellation of the debt so if my 401K were high enough for me to be solvent but I 'lost' enough of the money prior to the completion of the short sale could this ensure I would be insolvent ?

I'm won't be insolvent 2010? (2009 return)
I owe $26000. to chase.
They have agree to take 35% ($9100.) which I have in a savings account right now.
SO my 1099C is will around 17,000.
Plus my car is paid off and it's value now at $8000. So I add $9100. savings + 8000. (car value) = (17100.) the day I settle? Not 2010?
So I won't be insolvent?
Figure I will owe around $2500. next yr in taxes :(

if i leave off my house equity(free and clear) and my IRA balance, how sophisticated are the irs computers to match those up to me? The house was bought cash, so as far as i know its unknown to irs unless the title closing company reported it, my IRA is known to them as i have some 1099's for withdrawing money to settle the credit card for which i am getting a 1099c. The debt is being settled in 2010, if it had been settled in 2009 i would have been forgiven by irs under the midwestern flood act of 2008 which forgives flood victims debt of tax obligations if settled by dec 31 2009, but i could not get a settlement and 1099c by then, would the irs take a offer in compromise on taxes owed if i have IRA and home equity?

Anonymous.
Do I have this correct that before you pay the settlement you have 17,100 in assets you owe 26,000 to Chase. Then you are insolvent. The calculation takes place immediately before the forgiveness of debt occurs. So unless there is something you're not including here then you are insolvent. Feel free to post more and I'll help you analyze this more. I have studied this section out quite a bit and have a Masters in Taxation.
Good Luck!

Is there a circumstance where no settlement is in the mix? For example, say a JDB like Portfolio Recoveries buys a debt for pennies. Now, they own the debt. They determine that the debt is uncollectable, so they "forgive" the debt for tax purposes and send the 1099c to the debtor. They've made a nice profit since their outlay was minimal and the debtor is liable for the taxes on the entire debt amount.

Can this happen?

I am not an expert on this but need to be this year, with $120k in "forgiven" cc debt and a short sale to go. The rule states that if a portion of the debt is "written off" by the creditor they can send a 1099c but even if they don't it is considered income. The IRS always gets you. I also believe that in order to take the loss for this money, the cc must do this. The IRS accounts for everything. If somebody gets income, somebody gets a deduction. If somebody gets a debt forgiven, somebody else gets income. There is always the other side of the accounting equation with them.

I, too, am looking at a foreclosure this year and am scared to death. I was set to file bankruptcy this year, but luckily learned of a proposed inheritance from my mother which is sizeable, so high ho, high ho, off to a tax lawyer I go. I learned of some sense of salvation where indeed my house is gone, but I do not have to walk away from my other debts, and can depart with some dignity. I am letting the house go, not jeopardizing what my mother was able to put away for myself and my siblings, and will be claiming insolvency. It took me many hours of research, and an explanation by a CPA/tax attorney to put my mind at ease in working out my finances to arrive at the realization that when the house goes into foreclosure I will be eligible to claim insolvency, protecting my mother's gift to me. It is a huge relief because I now have hope again. I was living a pretty sad existence after 9 modification attempts with no resolve with the bank. Never, ever a big bank customer again in any kind of way, NEVER!!!

my question on this issue is... in the liabilities section, under credit cards- do you include the balance of the credit card/loan you just settled or the total credit card debt minus the one you just settled?

Under the liabilities section, you will have to list the total credit card debt minus the one you just settled.

I do not believe that is correct.

The way I understand the timing is that for each settlement you take a snapshot at the time of settlement/forgiven debt. So that would include all assets and all liabilities as of immediately BEFORE the settlement. If the liabilities exceed that assets, you are insolvent at the time of settlement. Additionally, if the settlement makes you solvent, then you receive the deduction to the point of solvency.

The IRS seems to be looking at what your situation was before you settled for tax purposes. If anyone has other input that is not just a guess, please add it. But this is what I have learned.

Very good! Very informative for this forum. We settled 9 cards and received 1099s on all that we settled on with the OC. We kept a running spreadsheet as we settled of our assets and liabilities so we had a snapshot of them at each date. Then there was no trying to remember. Our situation changed too as we had a total loss on a vehicle half way through that changed our balance sheet.

When we were 1099ed, we just referred back to the spreadsheet, filled out our 982 and filed accordingly. We settled about 75K for a third of that overall and never paid taxes on any of that that was forgiven!

When are we suppose to receive a 1099-c? I settle last June and so far nothing? I have moved so with thing being forward it may take longer.
Plus if it bank or collection agent never files with the irs do you still have to claim it as income and how would we know if it was file or not?

No later than January 31.

Thanks Dan, I knew there was a deadline but wasn't sure. I will wait until the end of Feb to file since mail is taking a week or longer to catch up with us..
With my home under water etc when I settle I'm insolvent. Home is in foreclosure now so guess next year I will have to go the route of the mortgage forgiveness paperwork!.
For the first time in years I'm debt free, now if my health would improved and I could go back to work life would be really good!

Would this apply to business credit cards as well?