Have you had a debt settled for less than you owe? If so, chances are pretty good that you also received a 1099-C for the amount of the "forgiven" debt amount. WHAT? How can that be possible?
Unfortunately, if you settle your debts, the forgiven amount is considered taxable income. However, you don't necessarily have to included it as taxable income. Read on to hear Bob's story and how he was able to avoid paying taxes on his forgiven debt.
How to avoid paying taxes if you receive a 1099-C for FORGIVEN DEBT
Bob lost his job and started using several credit cards to make ends meet. He was paying for groceries, gas, and even had to take a cash advance once in a while to survive.Bob had every intention of paying off the cards, but due to our country's severe economic downturn, he could not find a job.
After about a year or so, he had added another $10,000 to his cards, making the total of all his credit cards to be about $22,000!The minimum payments on all of them totaled a little over $500 per month and he just couldn't meet his obligation. After 3-4 months of non payment, most of his cards went into collections, debt collectors started
Bob had heard about DEBT SETTLEMENT and DEBT MANAGEMENT, but didn't know if he qualified.
After a FREE COUNSULING SESSION, it was clear that he could not qualify for the Debt Management Program and therefore chose to enroll in the Debt Settlement Program.
Let's see what happened during the Debt Settlement Program:
After searching the net and talking with several companies, Bob had chosen a reputable Debt Settlement Company to help him settle his debts.
His total debt was settled at an average of 40% of what he owed, so his creditors FORGAVE about $13,000 of debt.
Because the amount of the forgiven debt was over $600, Bob's creditor reported the settlement to the IRS and mailed him a 1099-C. The 1099-C basically said that $13,000 had been forgiven and he needed to report that amount as additional income for the taxt year the forgiveness was granted.
But his Debt Settlement Company helped him understand that he was not going to be liable for the additional income and resulting tax on that income.
IRS Form 4681, says that if, at the time of forgiveness, you were INSOLVENT (meaning your liabilities were greater than your assets), then the forgiven amount DID NOT HAVE TO BE INCLUDED as additional income!
Since Bob had completed an Asset vs. Liabilities worksheet, provided by his Debt Settlement Company, he was able to completely avoid any additional tax on the settlement or "forgiven" debt shown on the 1099-C!
If you have received a 1099-C and need help, we can help, please let us know!