Settling debt for less than the balance you actually owe involves debt forgiveness. Your creditor is forgiving a portion of the debt owed to them because collecting something from you is better than nothing. But there are IRS rules for your creditors to follow if the amount forgiven exceeds $600.00. Your creditor is required to file a 1099-c notifying the IRS that a portion of your debt has been canceled. You can expect to receive a 1099-c from the creditors you settled accounts with starting in January, for the settled credit cards in the prior year.
It is becoming more common to receive a 1099c regarding entire balances being cancelled by creditors (you never negotiated to pay less than the balance owed).
Are you required to pay the debt forgiveness tax?
The amount of your debt that is canceled is viewed as income by the IRS. You therefore must include the amount of debt forgiven as part of your income in tax filings for the year in which you settled debt.
Whether or not you will actually owe and pay taxes on forgiven credit card debt will depend on whether or not you qualify for the “insolvency exclusion”. The insolvency exemption is an asset vs. liability exercise. Solvency has nothing to do with your income as derived from wages or a salary such as from your employer. Solvency for the purposes of determining a tax obligation relating to forgiven debt centers on what you owe vs. what you own.
You will certainly want to speak with your accountant or a qualified tax professional to establish whether or not taxes will be an additional concern, but here are some resources to review, as well as some tips to help you stay organized and prepared, for your tax filings when settling credit card debts.
From IRS Publication 908, page 24:
Insolvency exclusion. A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV of the assets. Determine the debtor’s liabilities and the FMV of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.
Exclude from the debtor’s gross income debt canceled when the debtor is insolvent, but only up to the amount by which the debtor is insolvent. However, you must use the amount excluded to reduce certain tax attributes, as explained later under Reduction of Tax Attributes.
You, or the tax professional you use, will need to file form 982 related to any exclusion claim you may have. The form 982 can be viewed on page 27 at the same IRS Publication 908 link provided above.
Figuring Out Taxes on Canceled and Forgiven Debt
The IRS insolvency quote above uses the abbreviation “FMV”, which stands for Fair Market Value. In other words, what is your stuff worth? You will need to establish the value of the things you own just prior to a credit card debt being settled.
- The value of a car you own outright can be established through the Kelly Blue Book guide.
- Your home’s value can be ascertained by an appraiser or a broker’s price opinion (BPO) where the selling price of comparable homes in your area will be used in establishing the current value of your home.
- If you are underwater in your home’s value (you owe more on your mortgage than the home could be sold for), like many Americans today, the amount you are underwater is a liability, not an asset.
If your home has equity at the time of your settlements, the amount of that equity would be considered an asset.
Simple Exercise to Test Your Solvency After Settling for Less
Take a blank page and on the left side list all debts you have. Include mortgage debt, amounts you still owe on a vehicle, your credit card debts, any and all debt obligations that were extended to you via credit and loans. On the right side list all of the assets you have, including the fair market value of your home and car, the balance in your checking and savings accounts, your retirement accounts etc. Now add up each column. If the total of your debts on the left side add up to more than the total of your assets on the right, you are what is sometimes referred to as “technically insolvent”. By what amount you are insolvent each time an account is settled for less than the balance owed is what will determine whether you meet the insolvency exclusion and thereby whether you will owe tax on forgiven debt.
Many will owe no tax on canceled debt when applying the insolvency exclusion. Others will not be taxed on the canceled debt of the first several accounts they may negotiate lower pay offs for, but as their unsecured credit card liabilities are decreased one by one through settlement, may find the scales tipped to solvency once settlements are reached on the remaining accounts. Some people will not qualify for the insolvency exclusion.
Should you be concerned about debt forgiveness and taxes from settling credit cards?
Yes, and you should plan and budget accordingly. But should your concern reach to the level of not pursuing debt relief through negotiating the balances down which creates the canceled and forgiven debt and the tax? That will depend. You are reading the debt relief program because you are unable to continue timely payments to your creditors. Did that fact change because you read this report? Not likely. Settling credit card debt is still a legitimate option to avoid filing for bankruptcy. Owing taxes on forgiven debt, if there are any that apply to your specific situation, will simply factor into your overall program design.
What you may now better appreciate is that debts discharged in bankruptcy are not taxed. Bankruptcy is the only legitimate way to eliminated the tax concerns related to debt forgiveness. If you can qualify for discharge of your debts in a chapter 7, and the filing of a chapter 7 does not force the sale of assets, some of which could have been sold to fund settlements and pay taxes (if owed), then chapter 7 is something that you should become more informed about.
What is certain is that you cannot afford your debt. Struggling to pay minimums for however long you have been stuck in a debt trap must end. Keeping this in perspective; owing any amount of taxes on forgiven debt is the result of you saving money and getting out of debt faster than could have been accomplished otherwise.
Update 12/2013: A friend and industry colleague, Charles Phelan, has developed a great tool to help you, or your tax preparer, get through the IRS insolvency form 982. Checkout the insolvency calculator available on his site: https://www.zipdebt.com/1099-C-insolvency-calculator.php
If you have questions about debt forgiveness and taxes related to settling unsecured debts like credit cards, post them in the comments below for feedback.
If you are new to the CRN site and would like to get comprehensive information about settling debt, you will want to read through the debt settlement section of our free online debt relief program. Get started with: An introduction to debt settlement.
Michael, this quote didn’t quite make sense to me. “It is becoming more common to receive a 1099c regarding entire balances being cancelled by creditors (you never negotiated to pay less than the balance owed).” So if our total Synchrony debt is $14k and half is forgiven or cancelled we may receive a 1099c form regarding entire balance being forgiven or cancelled? I don’t understand how that makes sense or if I’m interpreting this correctly. Thanks!
You can expect the 1099c when settling a debt and saving more than six hundred dollars.
The bit about getting a cancellation of debt 1099c when you never settle, just never paid, is that banks like Chase, and some others, have been sending them on balances that have gone uncollected and unpaid after 3 to 4 years.
Is a gift considered an exception to the 1099 C? If so, what is required for documentation and does the person paying off the settlement as a gift have to report to IRS?
I would talk your situation over with an experienced tax pro.
When do you get a 1099-c from your creditor, when you have fully settled your debt? Or when that loan is officially charged-off the books and you are still negotiating a debt settlement?
Usually the January after you have fully paid off your settlement.
I just noticed my credit has been hit with a new $45,000 credit card account. I believe the new card is coming from my wife’s Chase credit card. I was added to her account to get a second card under her credit. My wife has just signed up with, I believe, a debt settlement company.
Is this new $45,000 credit card debt suppose to hit my credit?
Thanks
If you are an authorized user on your wife’s credit card, and that is reporting to your credit, you get the benefits when she keeps the payments current. You also get the drawbacks if she stops paying. I would immediately get her to remove you as authorized user.
In 2013, Asset Acceptance attempted to sue me for two debts they claimed I owed them. I obtained an attorney and those two cases were dismissed by Asset Acceptance. From reviewing my credit report, during this same time Asset Acceptance continued to report a third unverified collection account to the credit reporting agencies.
Asset Acceptance never validated this account and continued to report to CRAs and IRS after not being able to validate the two other accounts that were dropped in court. At some point after this, Asset Acceptance filed a form 1099-MISC to amend my 2014 tax return claiming that I had unreported income of $8000. I now have a notice from the IRS saying that I owe an additional $1200 in taxes for 2014. They did this knowing it was not valid.
Dropping a case in court is not the same as invalidating a debt. If the judge did not rule the debts invalid, they are not going to treat it any differently.
That still does not mean the debts are valid. What can you share with me about the debts not being yours, the result of fraud, or disputes on the charges that you filed with the original creditors?
Michael,
My brother is currently eligible for Medicaid. If he gets his debts settled his income will increase such that he will lose his medicaid eligiblility. It would be best to have all of his settlements occur all in one year so he only loses one year of medicaid eligibility. We’d like to settle on the payoff amount, via phone call, at the end of December to take advantage of possible end of the month/quarter/year quotas but want to pay the lump sum after the first of the year so he’ll keep his medicaid eligibility for 2017 (which is based on 2016 income). i.e. we want the income to be realized by IRS standards in 2017.
I wonder if you know which date constitutes the actual settlement? Is it the date of the settlement agreement over the phone, the date of the settlement letter generated by the company, or the date of the actual payoff?
Thank you!
For income purposes it will be the date of the final (or only) payment.
If you settle for a single lump sum, than it is the date those funds clear.
If you settle for 6 payments over 6 months, it would be when that 6th and final payment clears.
My brother rec’d a 1099c from the Pinnacle Group that stemmed from a tv bought at Sears 20 years ago! This debt has been passed to many different debt buyers and he has rec’d a few letters asking him to pay up. Due to the fact that the first letter came 14 years after the fact he ignored it with the understanding that the statute of limitations had expired long ago. He filed his 2015 taxes on 1/29/16 and this 1099c came yesterday. On the 1099 it said the qualifying event or some such thing occured on 8/15. We do not know what that means. He doesn’t know if he should amend his tax return or what? Really, a 20 yr old debt they can do this?He has 2 cars so he wouldn’t qualify for the insolvency rule.
Talk this over with a tax professional, but I am pretty sure a 20 year old unpaid debt being forgiven would not generally qualify as something you would have to claim.
Let me know what you learn.
we received a call from Pinnacle Group for my husband for a Cross Country Bank(visa) 480.98 from 2002 he told me that if not paid he was sending it to the IRS and we would be charged 2493.46 and they were filing 1099C is this possible?
Phone
Generally speaking, yes, a debt buyer like Pinnacle Group could cancel a debt and file a 1099c with the IRS. Debt buyers do not do this proactively (at least not yet, but I have often wondered why it is not more commonplace).
Settling with a debt buyer will often result in a 1099c too.
The thing is, the amount forgiven should be more than $600 in order to trigger the tax documentation and income treatment on a forgiven debt. The balance you shared is less than that. I am sure there are fees that have been added to the balance to take the amount of collection of the $600 threshold, but those could be left out for tax purposes.
Talk to a tax pro to see what this would look like for you. You may want to talk to a debt collection violation attorney about whether Pinnacle made a threat they will not follow through on in order to collect. I can email you contact details to attorneys you can consult with at no cost if you post the name of a nearby large city.
Michael,
I received a 1099-C from Capital One in Dec. 2014. The amount on the form was $600, which is what the original credit limit was. I pulled up my credit report yesterday and the trade line is showing up as charged off with a $1200 balance. I’m about to start a round of disputes with the credit bureaus, validation is step one for me, but the situation being what it is, should I just skip validation on this one and just dispute balance owed?
Thanks in advance.
It sounds like you got a 1099c for forgiven debt from Capital One, but never negotiated and paid a settlement to them. Is that what happened?
Yes. I stopped paying the account in 2010 while it was over limit to $650. The interest and fees grew and the account was passed around between a couple of debt buyers but I never admitted the debt or negotiated with anyone, not even over the phone. All of a sudden collector’s trade lines associated with it came off my credit report and I received the 1099-C from Capital One. It was maybe a month before the SOL expired. Haven’t heard from them since but I did notice the balance still on the report.
If your last on time payment to Capital One was less than 7.5 years ago the credit report will likely continue to reflect an unpaid balance. It is common for balances to be inflated when not being paid. The additional fees and interest that can be tacked on contractually are what cause that. While the IRS received notice through the 1099c from Capital One that $600 dollars was cancelled or forgiven, the fees and interest can still legitimately be owed (but not taxed).
Talk with your tax pro, or connect with one in your area, and get clarity.
Hi Michael,
I have a situation that I’ve been concerned about, regarding a cancellation of debt I included when filing my taxes this past March.
I had my taxes prepared with H&R Block. I received a 1099C for a credit card, so I had to include the COD (cancellation of debt) with the taxes I filed. The tax preparer included the cancellation of debt amount on the 1040 form as part of my income. He told me about insolvency and asked me a few questions to determine if I’d possibly be insolvent. Based off the answers I gave, he figured I would quailfy for insolvency. In the Adjusted Gross Income section on the 1040 form, the preparer excluded the COD income. Also, he submitted the 982 form, on which he marked the box “discharge of indebtedness to the extent of insolvency.” However, he didn’t submit any paperwork showing details of why I would be considered insolvent to back up the 982 form. He said he didn’t think it was necessary to do the extra paperwork unless the IRS asks for proof of my insolvency, and at that point we would provide the proof/paperwork.
Not long after filing back in March, I received both my federal and state tax returns. However, now, I’ve kinda been worried for the past couple of months about being audited and not having included the insolvency paperwork in the first place when I filed. I know he determined I’d be insolvent based off his few questions he asked me, but, by any chance I’m not insolvent, I’m worried about interest that will incur on the taxes I would owe and will have to pay.
What are your thoughts on this. Should the preparer have included the paperwork with the 982 form that was submitted? Do I have a good chance of being audited down the line? Should I go back to H&R and have them fill out the insolvency paperwork and submit it to be safe? I got their Peace of Mind offer, which says that they will assist me with any tax errors or auditing that should arise. Is this situation something I should be worried about?
I appreciate your help.
Best,
DMG
I know others who never submitted any documentation to substantiate insolvency. I am not a tax professional so take this with a salt grain, but I think filing form 982 and claiming insolvency for tax purposes regarding cancelled or forgiven debt, is most commonly done without documentation, but with the calculations and underlying financials reserved for the same instances your preparer shared with you.
I would not lose a bit of sleep over this unless the math was done without a complete accounting of all assets and liabilities. And I would also look at getting the opinion of a CPA.
Thanks for your insight, Michael. I appreciate it.
Best,
DMG
My wife has just under $45,000 in credit card debt. The bulk of it in two cards: BOA $24,000 and Chase $16,000. She lost her job about 18 months ago, and will probably not be returning to the work force. I helped her with these two monthly payments totaling about $890. About 5 months ago I ran out of funds, and could no longer pay the monthly payments.
Long story short we will be settling soon with BOA for around $10,000 and Chase for about $7,000.
Assuming that she will not be eligible for the insolvency exemption (because her name is on the mortgage that has about $130,000 in equity) does that mean that come tax time we will have to absorb the remaining $23,000?
If there is no insolvency exclusion, and were there a tax on the forgiven portion of the settled credit cards, you would be taxed at whatever rate you fall into. That amount will be far less the 23k. I see less than 20% often enough, which in this case would be under $4,600.00. Talk to a tax professional and get a sense of what your tax hit will be now, so that you can be better prepared next year.
Chase Bank claimed I was personally liable for a corporate credit card with an outstanding balance around $24,000. When I asked for a true copy of the docs showing I had signed a personal guarantee, they admitted having no paperwork at all. They claimed I “must have” applied by phone, or maybe I’d applied to another bank and Chase had purchased the asset. They bullied, threatened, and harassed for quite some time, until it finally dawned on them I had no intention of paying something I did not owe.
They reported it to the IRS as “forgiven” debt on which I owed income taxes. (My CPA took care of that, thank heaven.)
Then they turned right around and sold the purported debt to a collection agency. That was back in 2008 and I’ve been bullied by a series of collection agencies ever since.
Is it legal for a bank to report “forgiven” debt as taxable income to the IRS and then also sell it as debt to a collection agency?
I cannot speak to the legality of what Chase did. There is a bit of a conundrum with taxes on forgiven debt that still needs to be decided in court. I believe there are one or two cases pending that would help with your situation. But none of that helps you right now.
I can tell you that over the years of seeing something like this play out, I have seen the need to settle debts and amend tax returns (if within 3 years of filing), in order to accomplish other financial goals.
I should hope that Chase accounted for the income received from the sale of this account to a debt buyer. But there is little we can do to know if they did. Who is the debt buyer that has the account?
What is the outcome you would like to see with this? Your answer could help me offer actionable feedback.
My CPA entered it as income in one place on the tax return and subtracted it as an error in another place. He seemed to think this was routine solution to a fairly common problem. That was what, six years ago? and the IRS didn’t squawk. And it’s never been reported by anyone on my credit report. It wasn’t ever my personal liability and Chase admitted (in writing) that they couldn’t prove it was.
I was just curious as to how Chase could have claimed to have “forgiven” the debt and thereby make it taxable income to me, while at the same time claiming the entire $24,000 was still an outstanding debt that could be pursued by collection agencies.
I’ve lost track which one has it now — with debt this old that cannot be validated and is well past the statute of limitations (I’m in California, it’s 4 years here), I’ve found that the collection agencies tend to harass just by phone, they don’t put anything in writing. And I don’t answer my phone unless I know who’s calling…
You have something from Chase in writing that says you are not personally liable. It appears Chase made a mistake tagging the account as yours, and then mistakenly sold it.
I would not avoid my phone. I would want to talk to any debt collector in order to determine who they are, and where to send my written notice telling them the debt is bogus and to stop trying to collect. Each new debt collector needs to send you written notice within 5 days of talking to you.
Ummm… Michael, have you ever personally talked to a collection agent who was after your hide? They’re perfectly horrid … often downright evil. And if you think they politely answer your questions, especially when you want an address to mail a cease-and-desist letter, well, it simply doesn’t happen. I tried it once or twice. Never again. Nobody should ever willingly talk to a collection agent — any and all communications should be in writing. Period. And even then, the junk debt types will pull all sorts of illegal stunts anyway, but at least you can prove it if need be.
Sure, they’re obligated by law to contact a purported debtor in writing within five days of the first attempt to contact by phone. By the time you’re on the second or third collection agency, that doesn’t happen, either. By then, they know it’s junk debt and that you know enough to dispute it. They don’t want to give you a heads-up that anyone is after you — they want to catch you off-guard, by phone, so they can twist you around until you don’t know which end is up, threaten you, swear at you, lie to you, insult you — all the things the law says they’re not supposed to do, but can get away with over the phone.
Chase didn’t “make a mistake” (other than putting in writing that they had no paperwork.) They knew doggone good and well I wasn’t liable if they didn’t have a signed personal guarantee. They want money, and they don’t care how they get it. The collections department in a bank can be every bit as unprincipled as the bottom-dweller collection agencies that deal in junk debt. Chase bullied another corporate officer as well as me, by phone and by mail, for months — despite being unable to validate the debt as belonging to either of us, and despite repeatedly being told by both of us (in writing) to cut it out. When that failed, they reported the debt as forgiven to the IRS, just to cause me more grief … and also sold it to a collection agent so the collection agent would bully me. There’s no doubt in my mind it was a deliberate attempt to get even with me for refusing to fork over any money. I just wondered if it’s actually against the law to do that — I don’t remember seeing anything about that particular scenario in any of the debt collection websites I’ve scoured.
Just like it was deliberate when another bank filed a lawsuit against me and submitted a falsified document as “proof” that I’d signed a personal guarantee. Unfortunately for them, I tend to hold onto paperwork long after it should no longer be needed, and I could prove what it said when I’d signed it. The alteration was very obvious, and if it had been done with my knowledge and approval, I would have initialed it (as would the other corporate officer who signed the original.) They acted as if they were pursuing the lawsuit right up until the hearing, so I’d have to prepare and file a bunch of documents and pay an attorney etc. Then they cancelled the suit at the last minute without notifying me (which they are, of course, obligated to do) and falsified proof of service. I’d have gone to the courthouse if I weren’t so obsessive-compulsive that I double-checked the court docket the day before, to make sure I had the right time, and couldn’t find my case on the docket at all. The attorney thought I had a good case for malicious harassment.
Then there’s a collection agency up in LA that styles itself as a law office that got me in its sights. I tried the usual request for validation, denying that the debt was mine. They responded that I was claiming theft identity and that I was obligated by law to send them all sorts of information about myself, proof that I’d filed a complaint with the police, and so on and so forth. I think it was after my third demand for validation that they sent a letter saying proof of validation was enclosed. It wasn’t, of course. These guys are well-known for filing a lawsuit without notifying the purported debtor, falsifying process of service, and when the purported debtor doesn’t show up for the hearing, getting a judgment in their favor that is next to impossible to overturn. My next letter to them told them any and all future communications should be sent to my attorney. They didn’t contact me (or him) again … but I have my computer set to periodically remind me to check the court docket to see if there have been any lawsuits filed against me … just in case.
So I am applying for a loan and basically was approved for it but now the loan company is telling me that I need to pay off my outstanding credit card debts (even thou I was approved for the loan already with my crappy credit score). I told them how if I received a 1099-C form and had to claim it on my taxes. So I called one of the creditors and they told me that I could not make payments on it anymore because it now has become a “cancellation of debt” and they are all non collective accounts. The loan company response was if its on my credit report they have to go off that. How do I get this removed because they are not being helpful with me and I am on borrowed time trying to get this loan as it has taken almost 6 months now to get to this point. Thank you
Who are the creditors you are dealing with on the cancelled debt issues?
Who are you getting the loan through?
What year was it that you claimed the forgiven debt on your taxes?
Who are the creditors you are dealing with on the cancelled debt issues?
3 are with Chase and the other is with Citi Card. All four of them have sent me 1099-C
Who are you getting the loan through?
Weststar Mortgage and I will not recommend them. Been trying to get this loan since early November 2014
What year was it that you claimed the forgiven debt on your taxes?
Tax Year 2013
One way around this is to negotiate settlements on the prior cancelled debt; get the credit reports updated to show accounts resolved and zero balance owed; and then file amended tax returns. But that is not going to work if the creditors will not accept any form of payment.
I am not sure getting something in writing from Chase and Citibank about how they cancelled your debts, and will no longer accept any form of payment from you, would even suffice for Weststar Mortgage.
You are stuck in a bit of a grey area. The debt is legitimately reporting on your credit as unpaid, but you are being afforded no opportunity to resolve it.
I would suggest filing a complaint with the CFPB about all of the particulars. I am not sure what the outcome of that would be. But if your complaint is that the banks are refusing your payment, one result could be that Chase and Citi agree to accept your money, and update the credit reports.
Be as detailed as possible in your complaint.
Thank you for your time and suggestions. I will file that complaint right away.
I am going through the same thing. I was told to get a cancelation of debt letter from the creditor. But they refuse.
Is it Chase or Citibank you are trying to get a cancellation of debt from?
When did payments stop on the accounts in question?
Had you already received a 1099c and account for any of that on your taxes?
Hello, I’m not sure if you can assist me on this and I appreciate any help or advice you can offer.
Last month in February I received a 1099-C (cancelled debt) after I had already filed for taxes. The credit card debt was from a Department that is now 2 years over the statue of limitations in MA. I think I have an idea of how to file this by what I’ve read and I would prefer to not go through a tax agency because they can be pricey unless I have to. However, I went ahead and did the insolvency worksheet to see if I qualify and I do. So would I have to amend my taxes to avoid any future problems or audit since the IRS has a copy of the 1099-C too?
Not being a tax pro myself I would encourage you to connect with one for their advice.
If it were me in this situation I would amend my tax return now.
I received a 1099-C this year 2015. The Citibank credit card in reference, I was sued on then settled with them (for a lower amount) back in 2004, for $8K. The total debt I had on it was $15505.00 and showed it was charged off in 2007. The 1099-C I received is for $14240.28, I’m confused as to why I’m being taxed on that amount?
thank you,
Shawn
Nothing wrong with being confused. The math does not add up, and neither does the timing. Do you use a tax professional?
Ok Michael thanks for your time in this and I will file the complaint with the CFPB and update you. .Thank you very much for putting me in the right direction…
very simple question, I never paid any collection agency a dime on the credit card debt I had with capital one, and capital one chared off the account 5 years back and 1099c it on 1231 of 2014 and I got a 1099c in the mail 1st week of January 2015,and when I got the 1099c in the mail I disputed the balance with the credit bureaus Transunion 3 times, and finally Transunion told me to fax it to them and they would zero out the balance and they did, but capital one keeps reporting the balance to Equifax that its still owed, can they do this to me after they told uncle sam it was a loss and got there company a tax brake.
You would think it is a simple question, but what you outline is something akin to what I said about Capital One and collection balance credit reporting years ago.
I spoke to a senior staff attorney at the FTC, the attorneys with the largest cash awards against the credit reporting bureaus for FCRA violations, and others, about how it is possible for a balance to continue reporting, after everyone concedes a balance is no longer owed, and as evidenced by the reporting of a forgiven debt to the IRS. There was no simple dialogue that resulted from those efforts.
I cannot offer you a simple answer at this time. The CFPB is in the best position to get you the quickest answer, but via a credit reporting complaint you can file.
Short of that, I would still contend that reporting a balance owed on a collection account, that everyone agrees is no longer owed, is not accurate credit reporting. You can take this to court. You will need money to do that effectively. Attorneys will want to show how you were damaged by this. You really would not be able to show any damages with just a few weeks into this conundrum. Not until you apply for credit, and are subsequently turned down, and as a direct result of the amount of money CapOne still shows as uncollected, skewing your DTI ratios, or as an unresolved account (but you have not resolved, so still factually accurate).
If it were me, I would file the CFPB complaint. If you do that, I would be very interested in the outcome. It would be great if you posted an update.
Hello my question is, I had a capital one credit card that charged off 5 years back and capital one 1099c the account on 1231 2014 and I receved a 1099 the first week of January 2015 and had to include it in my personal income tax, I disputed the balance with the credit bureaus because of this and capital one refuzess to 0 out the balance, are they violating me .???
Did you ever pay Capital One (or any debt collector) any of the collection balance?
You may be referring to a big flaw in the way credit reporting happens around collection debts and our tax policies.
Hi Michael,
I received a cancellation of debt letter from Chase bank today in the mail. This is something I’ve never received before, so I’m freaking out a bit about what I’m supposed to do.
My Chase credit card had been charged off back in 2012. It had been passed around to different collection agencies, but I never made a settlement agreement with any of the companies nor paid the full amount. The last collection agency that sent me letters was United Recovery Systems back in July 2014. Now, on 1/29/15, I receive a letter from Chase informing me of cancellation of debt. I’m confused about SO many things! Please see and address my points below:
– Are credit card companies supposed to forewarn you about the possibility of cancellation of debt? I totally wasn’t expecting to receive this letter….
– My debt I owed was $4,846.52. However, the cancellation debt amount listed in the letter is now $3,763.57. Why is the cancellation amount lower than the initial debt? Am I supposed to pay the difference ($1,082.95)?
– I didn’t receive an actual 1099-C form with the letter they sent me. Were they supposed to include that?
-Will the IRS tax me?
– Is it too late to make payments with Chase bank directly or a collection agency?
-How will this debt cancellation affect my credit score and credit report? Will both report negatively for years?
– Every year I give all my tax documents to my dad, who then gives them to our family tax preparer. However, I don’t want my dad to know about this horrible situation I’m in, so this year I would like to have someone else do my taxes. How do I go about finding someone trustworthy that can help me with this debt cancellation/1099-C stuff? I live in California and am clueless.
– I know NOTHING about debt cancellation, 1099-C forms, etc., as this is the first time I’ve ever been in this horrible situation. What should be my next plan of action???
I SO appreciate your help with this matter! Please let me know if you need additional information on my end in order to better understand/help me.
Best,
DMG
I moved your comment to a more appropriate page of the site that discusses the tax implications of forgiven, or in your case, cancelled debt. Read the above article.
No, credit card companies are not required to forewarn you about cancellation of debt.
I am not certain why the amount Chase is saying they are cancelling is lower than what they were last trying to collect from you. It could be that there were collection penalties and fees removed from the final cancellation balance.
You can email me a copy of the Chase letter you got. I want to be certain there is not reference to their having informed the IRS about the cancelled debt. I can only think of one other reason for Chase to cancel your debt, than for tax purposes, but that should still result in a 1099-c.
The IRS will tax you on forgiven debt, which is what happens when you settle and do not pay a portion of the balance owed. In your case, it could be the whole balance that is being forgiven, even though it is the result of the bank initialing their own cancellation. The letter from Chase would help me get a better grip.
It is likely too late to set up payments with Chase or a collection agency. I am not sure why you would want to. Even if you do not meet the insolvency rule covered in the above article, and do owe tax on the amount cancelled, it would be far less than paying the debt off and/or what you would pay to settle the debt (which you would then have to figure taxes on next year).
Your credit report is going to still show a charged off credit card with Chase. There really is not any additional damage to your credit reports from cancelled debt, but do me a favor and get a current copy of your credit report and see if Chase is still showing a balance owed, or if it now says zero?
I do not have a direct tax referral to offer you. Just be sure you hire someone who is familiar with tax on forgiven or cancelled debt, and how to apply the insolvency test, as it may relate to your situation.
You do not have to do anything special with all of this. Get the details in the hands of your tax pro, look at your credit reports to see what Chase is saying is still owed (which should be nothing if they are formally cancelling your debt), and be on the look out for any later collection efforts on this account. I do see that from time to time, so post an update if it occurs.
I will point out that there has long been commenters on the internet that encourage people to never settle a debt because they will owe a tax on the forgiven amount. That is not true with most of the files I have worked over the years, as they find they meet the insolvency test, whether partially or fully. But it has also been untrue for the fact that a creditor can cancel the entire debt and send a 1099c to the IRS anyway.
Hi Michael,
What is your e-mail address? I want to send you the letter from Chase as you requested, but I don’t know what address to send it to. Pls advise.
Thanks!
DMG
You can respond to the one I just sent you.
DMG – I received your email with the Chase forgiven debt letter attached. That letter is the norm for Chase to send out. The front side upper right corner tells you that the information contained in their notice to you is what has been provided to the IRS.
As to your question about using H&R block as your tax preparer, I am sure that would be fine. Just be sure the preparer you talk with is familiar with the insolvency test for whether you will be taxed on forgiven debt. If not, ask to speak with someone in the office who is. You may already have calculated whether you can be considered insolvent using the outline in the article above. If you are clearly going to owe tax on the forgiven Chase balance, it is not something to get hung up on with a tax preparer.
Hi Michael,
Thanks for looking over the debt cancellation letter and getting back to me. Pls advise on the following:
– You asked me to take a look at my credit reports to see what Chase was reporting on them. I received a credit report in the mail from Experian on 2/6/15 and the status listed reads “Account charged off. $4,846 past due as of Nov 2013. This account is scheduled to continue on record until Sep 2018.” Since the cancellation of debt occurred on 10/22/14, should Chase be reporting a zero balance? Also, FYI, I only requested a credit report from one bureau because I didn’t want to use up all 3 free requests at once. But do you think I should request reports from the other two bureaus at this time, too?
– As I mentioned in my initial post to you, my debt I owed was $4,846. However, the cancellation debt amount listed in the letter is now $3,763.57. That’s a difference of $1,082.43. I called Chase to inquire about this and the woman mentioned something about the $4,846 amount including interest fees, which I’m guessing the interest fees aren’t being included in the debt cancellation amount (thus bringing the amount down to $3,763.57). My question is, what becomes of the $1,082.43 that wasn’t included? Am I expected to pay the $1,082.43 still? I haven’t received a bill for this yet, but will I have to pay it later on down the line?
– I’m quite stressed about the insolvency aspect. I don’t own a car or home, so I don’t have to figure out costs there. However, I’m so confused about figuring out the costs of personal assets like jewelry, clothes, books. How do I figure out their FMV worth? It’s giving me such a headache, I almost feel like just going ahead and paying the tax amount I’ll owe.
– Where do I get the 1099C form and 982 form? Can I get them online and print hard copies? Or do I have to wait to get them from my tax preparer?
Thanks SO much for all your help with this!
Best,
DMG
If it were me, I would not pull all of the credit reports.
I doubt that amount of phantom money (the interest and fees) will show back up in the future. If it does, post an update and lets go from there.
I would figure the value of your personal items at about what you could get at a garage sale. My T-shirt would be worth about 50 cents; my button up shirts 2 bucks maybe; jeans 5 bucks a pair; books a buck (maybe); and jewelry would be melt value of the metal (stones, unless the highest quality, are not worth much).
The links in the original article above lead you to IRS form 982, and also the insolvency worksheet. I would also talk this over with your tax preparer, and run the “value of your stuff” questions by them to.
continued from 12/24/14
Dear Michael You asked me a question and i never answered it, sorry, I live in Metuchen NJ, and the larger city next to me would be New Brunswick NJ, which is where the courts are also, Perth Amboy NJ maybe, for getting me an experienced debt collection defense attorney, thank you so very much, Michael, and have a BLESSED CHRISTMAS and HAPPY and HEALTHY NEW YEAR FOR YOU AND YOUR FAMILY, and whenever you get a chance to get back to me, i’d appreciate that, sincerely, James Lep
I sent you contact details for an experienced consumer law and collections defense attorney in Brunswick.
Dear Michael thanks for getting back to me so fast, it seems that all the attorneys want money up front to work at getting the debt lowered, i made an apt with a theodore sliwinsky but he started with i give him $1000, and then $750 and finally $500 and to see him at 2pm tomorrow but want i really want to do is to have someone negotiate getting the amount lowered but even though i only owe 1,275 i dont know what the attorney fees are or etc. But what about the attorneys for the plaintiff saying that im idiotic, and said i never filed an affidavid which i did. Isn’t there someone in nj from the fair credit debt agency that can settle this with the atorneys from capital one? Sorry to burden you Michael, but the help you give to people is a blessing. Have a happy and healthy Christmas for you and your family. GOD BLESS YOU MICHAEL. Sincerely, Jim
I hope you and yours had a great Christmas too James.
The collector referring to something or someone as idiotic in a court filing may/may not be actionable. You will want to talk about that with an FDCPA attorney in NJ. You can often find one who has debt defense, and fdcpa violation experience through http://www.consumeradvocates.org.
It sounds like Sliwinsky is looking to charge you more than the cost of paying Capital One in full?
Hi Michael, i’m in new jersey and tried to handle the civil action against me on a credit card debt by myself, did everything by the book filed an answer, the interrogatories, had a non jury court date on nov 17. I showed up pro se, but no plaintiffs or there attorneys, i was handed a paper by the man in court no judge that the judge signed on this case 2 days before the non jury trial for summary judgement, I was never notified. Also the plaintiffs attorneys called me an idiot on a certified paper package. I have until dec 28 then they can start the process of garnishment or whatever, i’m on unemployement 56 years old nothing is in my name, can you call me Michael, its my birthday tomorrow and i’m a nervous wreak, to say the least, i waited to long, i was going to appeal this but its allot of money. Today is december 23, 2014. Michael my cell phone is [edited], thank you Michael, and GOD BLESS YOU.
James – You should be connecting with an experienced debt collection defense attorney in New Jersey. I can help you locate one who offers a no cost initial consult if you like, just post the name of a nearby larger city.
Unemployment cannot be garnished, but your bank account is at risk of a levy, so keep little in the account until this is resolved.
IF A CREDIT CARD SETTLEMENT IS DONE AND THE ACCOUNT IS MARKED PAID AS AGREED ARE THE BANKS REQUIRED TO SEND A 1099?
Creditors should meet their IRS reporting requirements regardless of how they report items on your credit reports. If the settlement resulted in 600 dollars or more in savings to you, you should anticipate the 1099c.
How long can a creditor hold a delinquent debt before they charge it off? I had a debt go into delinquent status in 2002/2003 and I received a letter today (May, 2014) from the IRS stating my 2012 tax return is incorrect because of a 2012 charge off for that debt. Can a creditor hold a delinquent debt 9 years before charging off?
Lois – Creditors “charge off” debt, like a credit card, following GAAP (generally accepted accounting principles), and federal regulatory guidelines. That does not mean anything to us, other than it became a date line on our credit reports, and it is the time many creditors will determine whether to assign, sue, or sell, in order to try to get paid.
The 1099c a creditor or debt owner may send out when forgiving all, or a portion of debt (like when they settle for less and the savings to you is 600 dollars or more), is not subject to a drop dead date like with charge off, when they are forgiving 100% of the debt. At least, not that I am aware of.
Talk to your tax professional more about this. There are some cases I am aware of where something like what you describe has occurred so many years later, that if you dispute this with the IRS, the ability to the 1099c furnisher to substantiate their reporting does not exist in a reliable manner.
Who was it that sent the IRS the notice of forgiven debt?
It was USAA Savings Bank that I had a credit card through.
I got a request from CACH, LLC to complete a W-9. All former debt I’ve had was done and over with last year (2012) including 1099’s for cancelled debt. I’ve never heard from, of, or dealt with this company. I’ve never worked for them.
Why are they requesting the information and should I provide it?
Chrysalis – Cach LLC is larger debt buyer and debt collection company. They may have picked up some older debt that someone you worked with in the past mistakenly sold, or this could be some other form of mistake. I would look to confirm whatever you can with them about why you received that. I would also talk to your normal tax professional about this if you use one.
Reading an article written by you, about school loans and bankruptcy, you said that school loans would not be effected by a bankruptcy after a few years….I cannot get a school loan even though it cleared the 7 year mark on July 18, 2013. My credit score is 685, I need 700.
any comments?
Thank you,
Mary Beth
marybeth – Who are you going through for the student loan? What school are you looking to attend? Have you connected with the financial aid office at the school?
Federal student loans are regularly underwritten after a bankruptcy, and certainly 7 years after your discharge.