MissRedmond Posted May 6, 2005 Report Posted May 6, 2005 Hello! I'm new to this board & am just starting the whole debt settlement process, gathering information, etc. I don't want to file bk, so this is my only other option. I know it's bad, but I'm going to have to cash out my 401(k) to pay off the settled amounts, if they even settle at all. When you cash that out, you pay taxes as if it were income, plus 10% penalty. So, I pay taxes on my 401k & then taxes on the forgiven amount, yikes!My question is, has ANYONE out there been able to negotiate a settlement with the condition that a 1099 not be given? Is that even possible by legal standards or are their hands tied?Thanks!Miss Redmond
chincheck Posted May 6, 2005 Report Posted May 6, 2005 a 1099 is issued if the creditor has declared your debt a charge-off/$0 balance. This means that they are declaring the debt as uncollectible, and they are going to take a tax write-off on it. This obligates them to report it as a 1099.Are you negotiating with a CA? If so, then they have no way to prevent the OC from filing a 1099. If you're negotiating with the OC, the whole point is moot because accepting your payment prevents them from getting a tax write-off; hence, no 1099 will be filed.
MissRedmond Posted May 6, 2005 Author Report Posted May 6, 2005 a 1099 is issued if the creditor has declared your debt a charge-off/$0 balance. This means that they are declaring the debt as uncollectible, and they are going to take a tax write-off on it. This obligates them to report it as a 1099.Are you negotiating with a CA? If so, then they have no way to prevent the OC from filing a 1099. If you're negotiating with the OC, the whole point is moot because accepting your payment prevents them from getting a tax write-off; hence, no 1099 will be filed.Okay, so if the OC accepts a settlement from me to clear my account to a $0 balance & I pay them XYZ dollars, they can not 1099 that amount? I'm new to this, so please bare with me here Let's say the amount I currently owe is $25,000 and they settle at 50%. I then pay them the $12,500 & my account is now $0. Because they accepted the $12,500 as payment in full, they can NOT 1099 the other $12,500? I just want to be clear on that.Thanks so much for your response!!!Miss Redmond
MissRedmond Posted May 6, 2005 Author Report Posted May 6, 2005 Oh, and yes I will be dealing with 1 collection agency out of the 6 cards I have. The rest are still with the OC as far as I know.Miss Redmond - Thanks!
chincheck Posted May 6, 2005 Report Posted May 6, 2005 Can you take a loan against your 401k? It might not be considered income if you pay your 401k back the money.For one thing, they will not accept any money from you if your account is a chargeoff/$0 balance. The reason why is because they would then have to declare that as income and be taxed on it. Why do that if they can get a refund from the IRS for the same amount? Therefore, the 1099 will be filed regardless of what happens. If you're negotiating with the OC, the whole point is moot because accepting your payment prevents them from getting a tax write-off; hence, no 1099 will be filed.I had assumed that the charge-off you were speaking of still had a balance attached to it, so my statement above was off. The good news is, they have sold this to a JDB for around $.05 for every dollar you owe for extra money. That's even less incentive for the OC to accept payment from you.I would get ahold of them and offer $0.10 for every dollar you owe plus tradeline deletion as a starting point, and go no higher than $0.50 on the dollar plus tradeline deletion. Worst case scenario is that you'll be paying 1/2 of what you owe plus taxes, and you might end up paying less than what you originally owed.
breathing_easier Posted May 6, 2005 Report Posted May 6, 2005 Let's say the amount I currently owe is $25,000 and they settle at 50%. I then pay them the $12,500 & my account is now $0. Because they accepted the $12,500 as payment in full, they can NOT 1099 the other $12,500? I just want to be clear on that.No, the OC is required by law to report any forgiven debt over $600 to the IRS. Your account will still reflect a $0 balance. I know...I went through this in December 2002 and had to pay income tax on all the forgiven debt. Of course, I didn't know that (or a lot of other things) because I hadn't found these boards yet. Was a rude shock. If the OC sells the debt to a junk debt buyer (CA) then the CA doesn't have standing to file a 1099-C. Before you pay make certain that you get in writing that the OC will agree to delete the negative TL from your reports or, at the very least, update it to "Pays As Agreed" with NO mention in either the Status or Comments section that the account was settled. Otherwise, a Paid Collection notation hurts your FICO scores as much as if you'd never paid anything. Learned that the hard way, too.
MissRedmond Posted May 6, 2005 Author Report Posted May 6, 2005 So basically, no matter if it's a charge-off or you settle for 50%, you're going to get 1099'd no matter what. That really bites!!! It is just for the amount they forgive though, right? Not the full balance, just the 50% you didn't pay? That would make sense, but just want to be clear on that. I'm not so worried about my credit report as I am having to come up with a hefty tax bill! ICKY!!!Thanks everyone so much for your responses! I want to know full throttle what I'm about to get into.Miss Redmond
breathing_easier Posted May 6, 2005 Report Posted May 6, 2005 Yes, the 1099-C is just issued for the amount you didn't have to pay, the "forgiven" debt. I had always received an IRS refund every year...never had to pay...until 2003. Definitely "icky!"
plugugly Posted May 9, 2005 Report Posted May 9, 2005 I'm a bit confused. If it goes to a CA and you settle with them, then there isn't a 1099 issued?
breathing_easier Posted May 9, 2005 Report Posted May 9, 2005 I'm a bit confused. If it goes to a CA and you settle with them, then there isn't a 1099 issued?I was only dealing with OCs and I know that by law OCs are required to file a 1099-C for any forgiven debt over $600. I don't believe that law applies to CAs who have purchased the debt, but I'd have to re-read the law to see what it says. Perhaps someone else here knows.
divemedic Posted May 9, 2005 Report Posted May 9, 2005 A JDB filed one on me when I sued and won. The IRS didn't care about the validity of the debt. They said "If the debt wasn't yours, then how did they get your SSN, address, etc?"Since the tax bill was less than what it would have cost to get a tax attorney, I just paid it. I figure it was the JDB's way of getting revenge. Live and learn. Next time, I ask for extra punitive damages so I can cover the taxes.
breathing_easier Posted May 9, 2005 Report Posted May 9, 2005 A JDB filed one on me when I sued and won. The IRS didn't care about the validity of the debt. They said "If the debt wasn't yours, then how did they get your SSN, address, etc?"Just goes to show you what "great" minds we have working for the IRS. There are a whole lot of ways that a JDB could have obtained your personal info. Doesn't mean that the debt was legit! Must have made you nuts to pay that tax bill after you'd beat the JDB.
amortgageman Posted May 9, 2005 Report Posted May 9, 2005 There is a way to get out of 1099-C income.Chapter 7 bankruptcies are allowed to ignore 1099C income all the time. The key is declaring yourself insolvent. Insolvency is when you have more debts than assets. Search irs.gov, 1099C and the guidelines will be there for you.
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