Debt settlement and 1099

[treehugger1]

I have an agreement with BOA for a five-year contract at a simple interest rate of 1.75% on $5000 in debt and another with them on $3000. Got a call today telling me they would like to settle the account sooner for 20 cents on the dollar, paid over 6 months. The monthly payments would be about 1.5 times the current payments. I did ask them about the 1099. They will send one in 2009.

Here is a paraphrase of what the IRS website has to say about taxable debt forgiveness:

According to the IRS website :
Insolvency

Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities exceeded the 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 recourse debts, and
*

The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.

Note.

This exclusion does not apply to a cancellation that occurs in a title 11 bankruptcy case. This exclusion also does not apply if the debt is qualified principal residence indebtedness (defined in this section under Qualified Principal Residence Indebtedness, later) unless you elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion.

Whenever there is s cancellation of debt, a 1099 is prepared. it is up to the taxpayer to use this information when they file there income tax return.

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 cancellation. You must also reduce your tax attributes in Part II of Form 982 as explained under Reduction of Tax Attributes, later.

Is this true? Its possible that under the IRS standards, and me being without any real assets other than pensions, etc, I might qualify for the insolvency exemption.

Has anyone had any experience with this?

[treehugger1]

I forgot to add that I've had these accounts for over 20 years. But, why would a company choose to offer 20 cents on the dollar when there is a 100% payback agreement over 5 years? I'll hazzard a guess that this involves a business and perhaps an accounting manuever on the bank's part. The loss occurs as a write-off, the company gets 20% inflow without having to employ a collection company, and in the short-term the botom line does not look as bad to investors/stockholders.

Just speculating...

[fltoo]

I forgot to add that I've had these accounts for over 20 years. But, why would a company choose to offer 20 cents on the dollar when there is a 100% payback agreement over 5 years? I'll hazzard a guess that this involves a business and perhaps an accounting manuever on the bank's part. The loss occurs as a write-off, the company gets 20% inflow without having to employ a collection company, and in the short-term the botom line does not look as bad to investors/stockholders.

Just speculating...

Future value of money.


I am checking into negotiating with creditors rather than do BK. I have been trying also to figure out the forgiveness of the difference due to insolvency.

Have no full understanding of it yet, but if true, negotiating seems to be a better path for me.

[HHM]

I am not sure what has you confused or what your question is...?

But, yes, if you are involvent according to IRS standards when a debt is cancelled, then the amount of the debt that is forgiven can be excepted from your taxable income.

[fltoo]

Sorry, didn't mean that in general. Trying to figure out insolvency for myself. There was no question.

If that response was directed at OP, sorry again, lol.

[Flamingo]

I forgot to add that I've had these accounts for over 20 years. But, why would a company choose to offer 20 cents on the dollar when there is a 100% payback agreement over 5 years? I'll hazzard a guess that this involves a business and perhaps an accounting manuever on the bank's part. The loss occurs as a write-off, the company gets 20% inflow without having to employ a collection company, and in the short-term the botom line does not look as bad to investors/stockholders.

Just speculating...

Remember, a business is out to make money. It would not offer to negotiate with you if it was not to its best interests. Not only will they get some money from you quickly and not over a 5 year period, they get a nice write off of the forgiven debt where you may possibly have to list it as income in the year forgiven and also deal with all that on your credit report for at least 7 years. It's always cheaper for them to try to settle.

Note - the forgiven debt could place you on a higher audit level if you utilize the insolvency format provided by the IRS. It would be to your benefit to get professional advice or preparation of your taxes for tax year 2008 if the debt is forgiven this calendar year.

[PoorGrammyinBK7]

Exemption may be limited...

When I was considering a settlement offer, I think I read that the exemption was limited to the amount of insolvency. Not sure on this but thought I would mention it, in case it is true and if it matters.

[HHM]

Yes, there is language in the publication that accompanies form 942 about how to calculate how much is exempt.

[ThreadsSnapping]

I forgot to add that I've had these accounts for over 20 years. But, why would a company choose to offer 20 cents on the dollar when there is a 100% payback agreement over 5 years? I'll hazzard a guess that this involves a business and perhaps an accounting manuever on the bank's part. The loss occurs as a write-off, the company gets 20% inflow without having to employ a collection company, and in the short-term the botom line does not look as bad to investors/stockholders.

Just speculating...

You are already in default so they may not think that you will complete the 5 year payback before defaulting again. Much less risk of default over 6 months. If it goes back to collections, there goes any profit they may have already made. Also, it costs them money to process your payments even if they are done electronically. They cut those costs by 90% in this case. And they get a nice tax write off and that is probably worth more to them right now than the remainder of the money. They are coming out even at the very least and I would say much better if I had to bet on it.

TS

[ssdsco]

I forgot to add that I've had these accounts for over 20 years. But, why would a company choose to offer 20 cents on the dollar when there is a 100% payback agreement over 5 years? I'll hazzard a guess that this involves a business and perhaps an accounting manuever on the bank's part. The loss occurs as a write-off, the company gets 20% inflow without having to employ a collection company, and in the short-term the botom line does not look as bad to investors/stockholders.

Just speculating...

[treehugger1]

I'll be checking with a CPA in the near future, but the publication is 908 Bankruptcy tax guide (Also discusses debt cancellation.)

My total assets sum to approximately $115K (includes auto values). My total liabilities are approximately $165K (Includes auto loans).
The liabilities include an enormous chunk of unpaid but current student loans, however, for the purposes of determining liabilities, I believe they are included. I'm going to look into this further. In terms of an audit, this would not bother me as I have nothing to hide and have detailed up-to-date info on all my liabilities. I also have to look into future values of pensions. I don't believe my future pension is considered and asset, as I realize nothing from the pension for another 8 - 13 years.

Again, the strangest thing is that I cannot file for a chapter 7 as my income is way over the means test. However, it appears that a no-asset case such as mine might come out better under debt cancellation than in a BK 13. If I can get $.20 - .30 on the dollar for $40K - $50K, I can cover this in less than a year. I'll only have my student loans remaining.

Will all creditors be willing to offer $.20 on the dollar? I'm not sure, but just the two BOA accounts total $8K of my unsecured. Quite a chunk in itself, representing slightly more than 13% of my unsecured debt (not counting student loans.)

Now, just the tax issue...?

[bboy]

how to get a settlement offer?

I have a few accounts with Bofa and have not paid them for the last 4 months.

I have not been answering anyones call? How do i get to the point where i can get an offer to settle for 10-20 cents on the dollar?

[cyn5]

I am curious as well about at what point do they offer to settle. Do you get a letter in the mail? Phone? What? Is it possible to try to have them settle when they call you? Offer them what you are willing to pay & call it good. If they do settle, do you get something in the mail from them describing your settlement and the timeframe? This is really interesting. Has anyone settled with store cards like Pottery Barn, Macy's, etc? Also, say they do offer a settlement and then you file for bk in a month or two, is the entire debt included in the bk or just the settlement amount agreed to?

[magyar123]

Negotiate through the mail - never over the phone.
If you're planning on filing snyway - why bother with settlements?

[treehugger1]

Wow, old thread! Here is the update. One BOA account sold to a national scumbag JDB who has never verified the debt. They report to the credit bureaus, but show the debt is disputed. I never hear from them. According to the three CRA's the disputed debt is not included in my scores, not that I give a sh*t.

The second BOA account called me a couple of weeks ago (14 days before chargeoff) and offered a new 5 year payoff plan at 0%. I took the deal. They wanted all the ususal stuff such as references, employer, assets, etc. I said NO to any info. They wanted to set up payment plans via a bank account/ debit card. I said NO. I will be allowed to go into any BOA branch bank and pay my payment.

BOA has always been excellent about sending followup letters outlining the pay-off/settlement letters.

In terms of 1099's. After meeting with some accountants, they implied I am responsible for taxes on forgiven principle amounts. The IRS laws require that the 1099 state both principle and interest amounts. This can be very tricky for JDB's (actual buyers of debt) and one should probably dispute the 1099 with the JDB. In my case, even though I make high wages I was insolvent at the time of charge-off and I still am insolvent under the IRS definitions. They seemed to think I would not be taxed on forgiven debt under the IRS' own regulations. Still, I decided not to negotiate with any OC's for reduced amounts. The OC's have a lot of bark, but none have bitten me.