Do Creditors Have to 1099 You??????

[Confuzed]

If you settle a debt for 50% off or even more, or when you get an offer in the mail, there is fine print about a 1099 when the forgiven amount is over $600 if I remember correctly from a letter I received a while back.

Do creditors have to fill out a 1099 form on the pardoned debt or can you negotiate settling the debt and the rest of the amount forgiven as a gift, or are they legally obligated to fill out a 1099?

If they have to because the law forces them to, then can I assume that roughly 20% or 30%?? of the forgiven amount will be owed as taxes??? (Just need a percentage/estimate of taxes to see if it is worth settling in the future) This scenario is in the case of not filing bankruptcy/proving insolvency is a headache anyways from what I understand (I could be wrong)

Thanks.

[AngelinaCatHub]

Well, I'm not a CPA, but what I know is, yes they are by law obligated to submit income tax information (1099).

As far as your tax liability. It depends upon your whole gross amount minus your exemptions. That is true with any income. 'Hub

[Flamingo]

If you settle a debt for 50% off or even more, or when you get an offer in the mail, there is fine print about a 1099 when the forgiven amount is over $600 if I remember correctly from a letter I received a while back.

Do creditors have to fill out a 1099 form on the pardoned debt or can you negotiate settling the debt and the rest of the amount forgiven as a gift, or are they legally obligated to fill out a 1099?

If they have to because the law forces them to, then can I assume that roughly 20% or 30%?? of the forgiven amount will be owed as taxes??? (Just need a percentage/estimate of taxes to see if it is worth settling in the future) This scenario is in the case of not filing bankruptcy/proving insolvency is a headache anyways from what I understand (I could be wrong)

Thanks.

You will receive a 1099 for the forgiven amount of the debt from each creditor for the year in which the debt was forgiven. It is not a "gift" nor any percentage thereof. What those amounts on the 1099s will do is increase your income for that tax year (it all gets listed on your tax returns, state and federal) and you will be responsible for the taxes owed and you could be looking at quite a tax bill.

[HHM]

Although people try to negotiate this fact; the IRS REQUIRES the issuance of a 1099 when debt in the amount of $600 is foregiven (there are other conditions as well). The bottom line, an agreement that violates the law (i.e. the CA agrees to not issue a 1099) is void as a matter of law, so even if the CA agrees to not issue a 1099, but does so anyway, there is nothing you can do about it.

In my veiw, DEBT SETTLEMENT is the LAST resort, not bankruptcy. Just on pure cost alone, it generally makes more sense to file BK, and BK brings certainty to the situation. Guess what, let's assume the CA doesn't issue a 1099, we are starting to see them selling the difference to another collection and that little piece of crap "paid in full" letter is worthless (unless you get sued).

If you can, save your money, and file BK.

[Confuzed]

Thanks for the info and now I know that they are legally obligated to send you a 1099 for the forgiven amount and I know what to expect if I settle.

Why is it bad to settle though, I can avoid a Chapter 7 on my credit report for 10 years, and when I pay in full, I can try to remove some of the negative information on my credit report, worst case scenario it drops off in 7 years, not 10.

You bring up some good points, the remaining balance can be sold off to another CA. That is a nightmare scenario but if they fill out a 1099, they cannot sell the balance, correct? Once a 1099 is filled out on the amount, it cannot be collected upon, or am I wrong.

This brings up another issue, why don't CA's try to scare you with a 1099 the whole amount? Is it because once they do that, you receive it as income and they cannot collect on it anymore?

I still feel that if I can negotiate/settle in the proper way (paid in full in writing, no remaining balance collected) then this is a better alternative than chapter 7, of course we are assuming that I will have the money to do this for all debts which are around 25k total. If I had 100k in debts, I wouldn't even consider settling, but as time goes by, the settlement amounts get better. I do feel that negotiating with the original bank/creditor is way safer than some bozo collection agency that will break their word even in writing. Unfortunately most of my debts have been charged off.

[HHM]

Your fear of chapter 7 and its long term effects is unfounded.
Also, you cannot remove negative, true, information from your credit report. If your account was charged off, you cannot get it removed (sure you may temporarily get it removed by a failure to verify, but it will come back).

Negatives are negatives. Missed payments can be reported for 7 years, charges offs, the same...these are all things that happen when you go the DS Route. Also, that whole getting them to agree to report as "Paid as Agreed" runs into the same issue as the 1099. FCRA (fair credit reporting act) requires reporting creditors to list "true" information, so even if they agree to list it as paid as agreeed, that is actually not a true and accurate statement, so you can't really enforce it. The irony that you don't realize, a BK will actually improve your situation because it puts a stop to the bleeding on your credit report.

It is true that BK is reported in the public records section of your credit report for 10 years, but it's negative impact only last about 2 years. Credit recovers over time, a BK is a ONE time event. You WILL be able to buy a house after 2 years (and sometimes sooner), You will get CC's offers in the mail within 6 months of filing BK, within 2 weeks of filing BK, every car dealership in your area is going to send you offers.

DS is not going to put you in a better situation, DS is often worse on your credit than BK, has a high degree of uncertainty (getting all creditors to settle, guess what, what if one creditor doesn't settle and decides to sue, then what are you going to do?), and is more expensive. Instead of scrambling to come up with $10-12K to settle (which is realistically what you will need to settle $25), file BK and then SAVE that $10-12K.

[treehugger1]

I agree with HH. In addition, consider the following scenario. The OC charges off. The chargeoff remains for 7 years. Suppose that two years later you receive a dunning letter from a CA for the same debt. You request validation and they comply. Once they comply they will report the account under collections. A new 7 year clock starts ticking for the debt, and now the debt will appear for a total of 9 years. Furthermore, suppose the CA sues you and gets a judgment. In most sates the judgment is good for 10 years (possibly renewable.) Now you are looking at 19 years of this debt staying on your credit report.

Look, if you are trying to save your credit and want the faster recovery, then file the BK NOW. If you don't care about your future credit rating and can survive wage garnishment, then who cares? Each decision is an individual one. What are your goals? What can you stomach when it comes to suits an dpotential garnishment? Only you know the answer to these questions.

[Confuzed]

Are you saying that the 25k I owe today which would probably turn into 75k+ with fees and interest in 7 years is required to be reported as income? Or when the SOL of my state kicks in? In theory? Or is this a law on the books? Can you clarify this?

If Chapter 7 is not an option, then why would I not settle if in 7 years I will have to report the forgiven debt as income, and to calculate that amount sounds like a nightmare (which figure do you go by, the original date when you defaulted on the debt or the accrued interest from what a CA says 7 years later?)

I thought that if the creditor does not collect the debt within the SOL period, they lose their right to collect the debt legally and you are no longer responsible for the debt. So you need not pay tax on that amount?

This is getting really confusing, lol. So in theory, my debts when they pass the SOL or 7 years (don't know which theory you are going by) will turn into a tax nightmare and I will have to deal with the IRS?

Input greatly appreciated!

[HHM]

You are being wildly optimistic that a CA won't sue you between now and the expiration of the SOL.

Confuzed, unfortunately, you must be visiting other websites with questionable information which is leading to your confusion. The SOL is merely a defense to a lawsuit, the creditors can continue to non-judicially collect the debt even past the SOL.

As for the forgiven debt, it goes off the amount forgiven at the time you settle. So, if your current debt is $25,000, a year from now, at 30%, that will be $32,500, and you settle for $14,000, your taxable deficiency is $18,500.

Do yourself a favor, save your money, file BK and end it. No offense, but you are being stupid with the DS thing.

[Confuzed]

BigBoy, thanks for the input!!

HHM, after reading for months here about settling, I have always agreed that it is better not to settle, not arguing that but when the 1099 issue came up, I started thinking about it. I believe it was Treehugger/Bigboy and others somewhere on this forum months ago mentioned that they want to save a chapter 7 in the case of a medical emergency, it is your once chance/every 8 years so this helped me decide not to take the chapter 7 path over 25k in debt. (This June will be 1 year since my first default on 8 credit cards). Plus I really don't want to go through all the bank statement scrutiny and means test (I am over the means slightly) in a chapter 7 and be forced into a chapter 13. (I am 70% sure I will be put into chapter 13).

I guess I will be in a storm of settling, lawsuits, and worst case scenario, a 1099 at let's say 25% of the amount is way cheaper and more reliable than settling and trusting a CA. (I already did the calculation of this) plus it is sad to say, but dealing with the IRS with a payment for a 1099 is much more reliable than dealing with a bozo collection agency in the long run.

I guess I will just wait and play it month by month. Thanks everyone for the input. I guess I need to save up some cash for those lawsuits and 1099s? At least they can't collect anymore after they fill that form out.

Any other angle/viewpoint is greatly appreciated on what approach to take as all of you have way more experience than I do in this situation. Thanks again!

[HHM]

Well, you could do that, but keep in mind, judgements are perpetual, there is no time limitation once a creditor files a judgment.

The real question you have to ask yourself is; do you really want to live like that, is that really your life ambition FFS (for f**K sake). File the chapter 7, no point in "saving" the chapter 7 for a very unlikely event when you need it now, again, no offense, your being stupid. (sorry, i need to call it like I see it). Since when was once every 8 years become once in a lifetime (unless you are 80 years old). This whole thing about saving the BK for a medical emergency is nonsense, really; what are the odds; that is simply poor judgement.

[catleg]

Part of the dilemma with "saving" your chapter 7 card is that it is no longer as straightforward to file chapter 7. Used to be a no brainer, just do it and get on with your life. Now there is so much complexity with chapter 13 avoidance and managing the 6 month window for the means test income that it is inescapable that some amount of strategizing about "when to file" is involved.

[treehugger1]

There are many cards in play when you are "bankrupt." Filing bankruptcy through the federal BK courts is only one option. I've written elsewhere about the many articles that are out there related to the fact that many, many folks simply stop paying their unsecured debt and accept the potential for future lawsuits, etc. The evidence of this is that there are FAR MORE chargeoffs on CC's then there are bankruptcies. I don't, for one minute, believe I am an exception. For a long-time I felt my situation was an exception, but the more research I do, the more I see that folks have been walking away from unsecured debt for years. Some suffer the consequences of a BK, and other simply ride through without ever a suit or judgment against them. Why? I have no idea!

Depending upon your state laws, some judgments continue forever, some judgments are renewable one time, etc. You really need to know your own state laws, and examine your own financial situation and determine what you can stomach in terms of CA's, collection attorneys, suits, judgments, etc.

Again, what I have recently been reading, there are far more households with chargeoffs, then there are households filing BK. A few years ago, there were studies published related to such behavior. Does this mean that such folks will ultimately "walk away" from their debt? Some probably will, but others will be sued in courts. What exemptions does your state allow? In m state, 75% of your take-home wages are yours to keep, the homestead exemption is reasonable, $7500 of exempt income in a bank account cannot be taken from you (even in BK here, this is the case,) home furnishings to the extent of $3000 are exempt, equity in autos up to $2150.00 is exempt, For folks in my state who have very good incomes, market values of homes decreasing, are upside down on autos, etc, BK is not necessarily their best current option. I would guess there are plenty of folks in the country who are paying out 40% - 60% per month on unsecured debt, and a 25% wage garnishment seems quite reasonable. This is especially true if you are in your fifties, have plenty of protected retirement socked away, don't care about your future credit, and have inescapable student loan debt. I don't think such situations are as uncommon as you think.

I seriously doubt that BK 7 is going away. While it may seem "more difficult," if you are under the means test with no assets, there is not much of a problem that I can see. The real issues that come up (and they did prior to BK reform) are the issues related to asset cases and folks protecting vehicles and homes.

[Brighterdays]

Hey all, You folks definately have an interesting debate.

I am unable to file ch7 for a little over a year, due to an inheritance. The inheritance isn't enough to settle full amount of my cards, but If I wait 120days and get them to 60% or less and figure in taxes, as I am unemployed this year i will be able to wipe my debt clean. Not being able to file Bk, do you see anything wrong with this scenerio? I expect to do better than 60% but that is my break even point(including taxes). so If i can settle for 30% then I actually have money left over as opposed to losing it all in a ch7.

I know a ch7 is by far the best option, but when that option isn't available, isn't debt settlement the next best option? I could care less about my credit score at this point as I can always restore it within a couple years. I am knew to this stuff, so if I am overlooking any potentials problems please let me know.

[Brighterdays]

I think I would have rather have 'blown' all my inheritance on a drunken gambling spree in Vegas (save all the receipts showing you really went for a few days). Then I would be forced to sleep on a 'lumpy' mattress for awhile before I file a CH7 then to pay it all off on settlements. <cough cough>

So, what will you do if one or more of your creditors doesn't want to settle? And you have spent a large portion of your money settling and still have to file BK?

I have thought of the creditor not playing ball, and the best i can come up with is that I plan to take the money out over time. I will get all them to agree in writing before hand before I pay one of them. I also will not be making my payments anyways so if one says no I will just eat it or if its large enough I will just wait out the year or so and go ahead and file.

My main problem is they have to sell my relative's house before its all done. Now that is only 10k or so coming to me.

I don't mind paying 40% of what "I" owe and some tax dollars to put this in my past. yeah I would love to not pay anything but right now that isn't possible.