The implications of all these 1099c's

[paradiddle]

I was thinking about all these 1099c and debt settlements. Will it be creating another section of people who will not be able to pay their 2010 taxes when the 1099C income is included?

[HHM]

Realistically, most people end up not paying tax on the forgiven debt since they fit into an exception, and despite the hype, not that many people settle debts on any large scale. It is one thing to settle $2,000 debt for $800 (that extra $1,200 is not a significant impact). The people that would have large 1099-C's eventually see the light and file BK at some point. After all, why spend $80,000 to settle $200,000; 9 times out of 10, settlement is simply not a cost effective solution.

[paradiddle]

How about the IRS Form 982 and insolvency to erase or reduce the 1099C income. I was just reading some good articles on that.

[HHM]

...fit into an exception...

That is what I am talking about

[sofarsogood2]

From IRS WEbsite:

Update Dec. 11, 2008 — The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief.

This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion doesn’t apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home’s value or the taxpayer’s financial condition.

2. Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you.You are insolvent when your total debts are more than the fair market value of your total assets.Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Certain farm debts:If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.The rules applicable to farmers are complex and the assistance of a tax professional is recommended if you believe you qualify for this exception.

Non-recourse loans:A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.That is, the lender cannot pursue you personally in case of default.Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income.However, it may result in other tax consequences, as discussed in Question 3 below.

I think there is a form 982 to submit with your taxes to dispute the 1099.

I think alot of people will fall into one of these categories. Maybe there should be a sticky about this, as it is tax time. Alot of people are probably getting these in the mail right now.