I’ve previously warned against working with debt settlement companies on the basis that many of them are scams and just take advantage of people.
However, here’s one more reason to be wary of debt settlement companies: 1099-C…. the tax document you receive signifying income when a debt is forgiven.
If you negotiate a settlement so that part or all of a debt is forgiven, the loan you originally received is no longer a loan in the eyes of the IRS. It’s income! And you have to pay taxes on it.
A 1099-C is the form that a creditor issues to you that indicates the amount of debt that was forgiven for any debts greater than $600 that are forgiven. When you do your taxes, any 1099-C amounts are counted towards your gross income which means that you may incur significant tax liability, especially if you negotiated away a lot of debt. This includes reduced credit card debt as well as mortgage debt canceled in connection with a short sale.
As a result, it’s extremely important to plan ahead if you intend to negotiate any debts away. Because there are a few ways to avoid 1099-C income.
- File for bankruptcy before the debts are canceled or reduced. Any debts forgiven during the course of a bankruptcy case are not considered income and you will not receive a 1099-C.
- Be and remain insolvent for the period while the debts are forgiven. If you have fewer assets than liabilities at the time, then the IRS does not consider your canceled debts to be income.
- Mortgage Debt Relief Act of 2007. Congress was nice enough to pass a law declaring that any mortgage debt forgiven to homeowners of residential real estate between 2007 and 2012 is not considered income and does not require a 1099c.
If you’re a New York resident dealing with financial problems and contemplating bankruptcy, don’t despair. There are many options and tools to help you deal with your debt.
However, the issues involved can be a little tricky. And it’s important to have a good New York bankruptcy lawyer helping you.
For more information, please contact me for a free initial consultation and I’ll share the benefit of my 30 years of New York bankruptcy experience to help you navigate the process and get the full benefit of the bankruptcy laws.
EMAIL Bruce Weiner
(718) 855-6840 (Local)
(866) 402-8476 (Toll Free)
Fax (718) 625-1966