Wait Long Enough And Creditor Settlement Offers Become JUICY

[DebtHater]

What they're not telling you, Ryan, is that they'll slam you with a 1099 for the change on that juicy offer. From what I've read here, if it's included in your BK, and you get a 1099, you report it on Form 982, but don't pay taxes on it. If you settle, you're obligated to pay the difference as 1099 income. Ouch....

You are only obligated to pay taxes on the difference if the settlement is with the OC. If it's with a third party CA then you do not have to pay taxes.

[lovemybugs10]

Debthater- I didn't know that. Does that apply to a company the OC hired to collect for them or only if it's been sold off?

[HHM]

You are only obligated to pay taxes on the difference if the settlement is with the OC. If it's with a third party CA then you do not have to pay taxes.

Absolutely, positively, not true.

There was even a big case on this whose cite escapes me. Collection Agencies wanted to get out of the requirement to issue 1099's, and the court said no, you fall under the definition of reporting entity and must issue a 1099.

[lovemybugs10]

Quick google- DBA v Snow?

[catleg]

Remember that you're only liable for tax on the original unpaid principal balance of the debt. JDB's often don't have this information broken down.
I wonder how they deal with it, do they just report wrong info or do they have a safe harbor and not report at all.

[lovemybugs10]

From what I'm reading, by law they are required to send a 1099. Even if they don't know where a person lives, they have to send it to the last known address. I haven't read anything that releases them from sending one.

Hypothetical question- If an original creditor sells the balance on my credit card will they send a 1099 for the portion they didn't receive for the sale?

Does that mean the jdb can't send a 1099 because one has already been filed? The jdb would have no way of knowing that the OC filed anything or for how much.

[catleg]

No - sale of a portfolio of debts doesn't trigger 1099 reporting.
In fact this is one loophole that JDB's can exploit--they can constantly freshen their portfolios as they come up on 3 years with no payments to avoid any IRS hassles.
But I tend to think they have a safe harbor provision based on their inability to discern the original principal balance of the loan, but I'm too lazy to research it. :-)

[lovemybugs10]

I see.

So then if a jdb wanted to 1099 it, they really only could for the amount between what they bought it at and the amount I settled with them at.

Although, after close to two years none of my debts have gone to jdb.

[catleg]

Their cost basis in the debt is not a factor in the 1099 issuance.
Just being able to establish what amount of "income" you gained from the forgiveness of a debt.
Even that is kind of a bogus, arbitrary number, but it sticks for tax purposes.
e.g. You borrow $1000, pay 30% APR for 5 years and you still owe maybe $800, but you've probably paid 2x-3x the original amount borrowed.
So have you really realized income? To the taxman, yes.

[shark66]

So have you really realized income? To the taxman, yes.

Or, as immortal George Harrison would have it:

Let me tell you how it will be

There's one for you - nineteen for me

'Cos I'm the taxman...

[IOEveryone]

Great thread. I find myself in a similar situation. I have approximately $150k of unsecured debt. It looks like this:

HELOC $60k
Home is already been foreclosed upon
L.O.C. $40k
L.O.C. $25k
C.C. $15k
C.C. $7500

Total Debt $147,500

I stopped paying the HELOC 1 year ago and the others 4 months ago. I lost my job in August. Since that time, I have been interviewing attorneys. After some education (including this thread), it appears I have the option of filing for non-consumer Ch. 7 (all monies used for a now defunct business).

Because I live in WA., I can utilize the federal asset exemptions guidelines (which is far more beneficial to me than the State’s guidelines). After totaling up my assets and subtracting the exemptions (car, cash on hand and jewelry), I’m exposed to approximately $15k, or 10% of my total debt.

While interviewing attorneys (by the way, none of them knowledgeable about non-consumer Ch. 7), each advised that I had two options. The first, explain to my creditors that I’m out of work and at my salary expectation, might be for quite sometime. The cost for me to file Ch.7 will be $3k in lawyer’s fees and the remaining $12k in non-exempt assets for a total of $15k out of pocket. Or, file Ch. 7.

I have been explaining this to all five of my creditors (technically, there are only three as I have a c.c. and LOC with a bank and the other c.c. and LOC with another bank) and each have listened and began offering settlements.

The HELOC has come in at 10% (based on education of what a Ch.7 will cost me). I have until March 1st to take the offer. The others have dropped from 75% to 25% in no time at all and I believe once I settle with the HELOC they may fall into line as well.

If I settle, I would then be on the hook for the 1099 c taxes. If I understand the insolvency guidelines, I am responsible for the only for the value of my total assets. For example:

Total Debt $150,000
Pay Off <$15,000>
Forgiven Debt $135,000

Total Assets $20,000 hypothetically

The IRS then considers the insolvency to be $115,000 and I would then pay the taxes on the $20,000 ($4 - $5k).

My total settlement is then approximately $20k on $150k or 13%.

Why would this be a worst path to go down compared to hiring an attorney and dealing with an unpredictable U.S. Trustee hoping for the best?

[HHM]

First, let's be realistic about the settlement amounts, you are not going to do much better than 25% on the other debts, so taking your statements at face value, your current settlement amount is $27,875 that you would have to come out of pocket.

If I am understanding you correctly, you have $15,000 in non-exempt assets.

Also, I think you may be doing the insolvency calculation wrong. If you are NOT insolvent, you don't get to exclude any of the forgiven debt income. See the insolvency worksheet in http://www.irs.gov/pub/irs-pdf/p4681.pdf
You only get to exclude from forgiven debt income the amount of the insolvency. So if your are only $20,000 insolvent, then you only get to exclude $20,000 (not the entire amount). Also, in this calculation exemptions DO NOT apply and everything counts, including retirement funds. If you so much as $1 solvent, then the entire forgiven debt is taxable income.

On paper right now, you are still better off in BK.

[ByeByeCCs]

Well I received an offer in the mail from AMEX via Nationwide today that made me laugh. While AMEX is suing me for two large balances, for a third account with a 600 balance they are offering me the ability to pay less than I owe (no specific amount mentioned) and get a 100 dollar gift card.