Everything seems great when your creditor has graciously agreed to settle your debt for far less than what you originally owed—especially when you originally owed more than $20,000. You have the right to be excited! In fact, you may even want to celebrate. But you might not want to celebrate so quickly. It turns out that you might still owe the IRS several thousand dollars for your forgiven debt. Keep reading to find out more about the 1099-C Cancellation of Debt form and tax consequences you may soon be experiencing.
A Look Into the 1099-C Cancellation of Debt Form and Tax Consequences
You may be wondering, “Why is the IRS taxing me on my forgiven debt in the first place?” Well, think of it this way: let’s just say that your creditor decides to forgive $500 of your debt; the IRS counts these savings as income since you’ll now have that (previously tied up) money in your pocket, available for other things. Because of this, you’ll receive a 1099-C Cancellation of Debt form and tax consequences right along with it.
In all honesty, this particular “nuisance” is actually pretty understandable. When it comes to taxes and taxable income, such a consideration makes sense. With that said, you might not be required to pay those taxes at all, thanks to the bankruptcy code.
The Bankruptcy Code and How It Affects the 1099-C Cancellation of Debt Form and Tax Consequences
So, like we mentioned, you may actually be exempt from paying the taxes applied to your forgiven debt. If you are determined to have been insolvent—having more liabilities than you have assets—at the time of your debt settlement, then you won’t have to pay the taxes on your forgiven debt. So if you calculate your net worth at the time and it ends up negative, you won’t owe any money to the IRS on the forgiven debt in question.
You can find more information about this exemption in IRS publication 4681.
CreditCards.com provides an excellent example regarding the situation:
For example $7,000 of forgiven debt income, the individual had total assets valued at $30,000 and total liabilities of $33,000 before the credit card debt was canceled, his finances were in trouble by $3,000. The cancelled $7,000 of debt income would be reduced by the $3,000 insolvency. The remainder $4,000 in forgiven debt is expected to be reported on the tax return as income. If the person was insolvent by the entire amount of $7,000 (liabilities minus assets), then all of the canceled debt income would be excluded from taxable income.
It is important to remember that you can still qualify for this exemption even if you are receiving a regular and steady income. The fact of the matter is that you can still be insolvent while earning money. After you’ve read IRS publication 4681 and successfully determined your insolvency, you’ll need to fill out IRS form 982.
While Strategic Debt Relief does not offer legal or tax advice, Yahoo Finance provides some useful information regarding the process of filling out the form. If you need further help, you should contact a tax professional.
Conquering the 1099-C Cancellation of Debt Form And Tax Consequences
When it comes down to it, the 1099-C Cancellation of Debt form and tax consequences are both pains that you shouldn’t have to go through after finally getting yourself out of debt. If you don’t actually have to owe the IRS money, then you shouldn’t have to put yourself into further financial hardship just to try to make it happen. A tax professional can assist you while filling out the necessary forms and claiming insolvency. In the end, you can say goodbye to the 1099-C Cancellation of Debt form and tax consequences.
If you need help with debt relief solutions, Strategic Debt Relief has helped many people move past financial crisis and can offer qualified advice regarding your situation. Call us at 877-297-4477 for a free consultation today.