Am I required to apply my credit card debt as gross income on my income taxes??

[jagbarbie]

I have about 70K in credit card debt between 7 different different credit card companies. I stopped making payments on these 7 credit cards August 2007. (six months ago)

I have never returned (or spoken) to any of the phone calls from these 7 credit card companies. Some of the accounts seemed to be now with collection agencies.

Messages left by some of the credit card companies have stated that they will either sue me and/or write off the bad debt and report it to the IRS and I will be required to file this as capital gains to my gross income.

Is this true???

I live in Florida.

Can credit card companies try to get a judgement against me for this credit card debt?

2 of the credit card accounts are listed under my Corporation but of course my SSN is liable for these to accounts. Does the law have different standards for Credit cards listed under company and person names?

Need help and accurate info please..

barbie

[Big Time]

They lie. You may have to fill out a 1099C form if they forgive the debt, then it would be considered taxable income, but forgiven debt can't be collected on. As usual, they are twisting the facts to make it seem like you're in big trouble.

They likely will eventually sue and if your income and basic cost of living is such that it would take you more that 3-5 years to pay it all off, then you are pretty much BK.

[jagbarbie]

If the credit card company writes off my unpaid debt and sells my account to a collection agency... then I will have to claim that unpaid debt of

$10- 20K on my income taxes ??

How will I know they reported this amount to the IRS??

Thanks Barbie

[TTigggers]

If the credit card company writes off my unpaid debt and sells my account to a collection agency... then I will have to claim that unpaid debt of

$10- 20K on my income taxes ??

How will I know they reported this amount to the IRS??

Thanks Barbie

No. That's not how it works.

The only time you would have to claim it on your taxes is if it is forgiven which means you don't pay it and it cannot be collected on.

Example you owe 1000 in debt and you settle for 500 you would have to claim the 500 you didn't pay on the debt in your taxes.

If you settle like this they will send you a 1099 in the mail with their info on it

When the OC sells your acct it has nothing to do with you it is a transaction between the OC and the CA

[TheRoadBack]

Here is alittle FYI for anyone who cares. If you get a 1099 from a creditor you do not have to declare it or pay taxes on it as it was income if you were insolvent at the time of the event. Insolvent meaning you had more $ going out then was coming in. Check with your local CPA but don't let them tell you you will have to pay. If you are not insolvent, then yes, you will have to pay. But if you are insolvent sorry Creditor.

I hope this helps someone out there.

[Big Time]

Good info TRB. IRS stuff always confuses me.

I have also used my magic powers to summon an enrolled agent of the IRS, who understands this stuff better than most people do.

[jq26]

The IRS has pretty decent online Q&A. Generally, if you receive a 1099-C, it is taxable gain (ordinary OR capital gain, depending on the underlying nature of the loan) that must be included in your year's taxable income except if you file bankruptcy OR are insolvent (total assets are less than total liabilities). Credit card debt cancellation would be ordinary gain and not capital gain.

If you get 1099'ed, don't ignore it because you are applying your own 'insolvency' test. It must be proven to the IRS. And they also receive the 1099 info, so they'll assess a deficiency. Note that non-recourse loans never result in 1099 income. Also note that insolvency is not a monthly cashflow calculation, but an asset/liability calculation.

A CPA should know these things, but here is a summary.

http://www.irs.gov/newsroom/article/0,,id=174034,00.html

[flacorps]

If they go more than 36 months without trying to collect on it, they must issue a 1099c on it. Note that if JDB sells to JDB without the debt ever reaching 36 months at any of them, there's no 1099 requirement ... also potentially a single dunning letter every 36 months would work to dodge the requirement.

The form for insolvency is a 982 ... to be attached to your 1040. It has a set of instructions too.

[TheRoadBack]

nice job flacorps. I wanted to post the form but it slipped my mind at that moment. Good info. I think it will help many on this board. I think most people on this board would be in the insolvent siuation otherwise they wouldn;t be here. Not everyone of course but I would suspect most.

[willingtocope]

All good info, but, realize that the IRS test for insolvency pretty much boils down to whether you would qualify for a BK 7 as opposed to a BK 13...without all the state exemptions...so all the things like your 401k or cash value life insurance gets counted in your "assets".

[jagbarbie]

Thanks again

Barbie