danieluvshanda

Is it possible to settle w/ OC w/o receiving a 1099?

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I have been on a payment plan for about 4 years with B of A. My original balance was $12K. I have made about $19K in payments and my balance is still $12K! I know rediculous right?

Anyhow, I stopped paying them in February and they have offered to settle for $6K today. How can I insure that I don't have to pay taxes on the unpaid amount?

And should I ask for a better deal than $6K or ask them to delete the derog from my credit too?

I really just don't want to pay taxes on the unpaid portion. It relly seems like they already got their money. Please help.

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The 1099c form has two boxes...one that says "amount forgiven" (or words to that effect) and the other that says "amount of penalty and interest included in the other". You only pay taxes on the first one.

I'd suggest if you take them up on their offer, get it in wrting what they plan to do about the 1099c...before you send any money. If they say they will issue one, ask for a complete accounting of the account from day 1.

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Well, if you pay in full, they would have no reason to 1099c you.

You can also try working out a settlement that pays back what you "borrowed" excluding penalties and interest...again, they'd have no reason to issue a 1099c.

The problem is...the 1099c thing is an IRS rule. They want their taxes on your "found income".

If you do receive a 1099c, there is a an IRS form (see Pub 982) that you can fill out claiming "insolvency"...but, you have to be insolvent on the day you receive the 1099c. IMO (I'm not a tax lawyer), in order to qualify for insolvency, you have to qualiy for a BK 7 without using any state exemptions...hard to do.

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You cannot negotiate not receiving the 1099C because they are required by the IRS to file it. However, you also do not have to qualify for Chapter 7 bankruptcy to qualify and be insolvent. Read at www.irs.gov about the 982 form and their definition and talk to them about insolvency. I have spent hours researching the subject and if your liabilities exceeds your assets then you can claim insolvency for the amount you are insolvent. Otherwise if your debts are $150,000 and your assets total $120,000 - you are insolvent to the tune of $30,000 and would be exempt by that amount. The problem lies in the definition of assets and liabilities. I printed off all my statement on my debts, assets and etc at point of settlement to show what my position was and to value my vehicles and home I used various services to value the same on line. I put these documents in a file in the event I am audited. You have to prepare a balance sheet and attach it to your 982 form when you file your taxes. I would think that if you included your supporting documentation as well you would help prevent an IRS audit. I intend to use an accountant as well when I file just to help to prevent an audit.

Even if I had to pay taxes on all the forgiven debt I'm still ahead because I cleaned up my credit cards, didn't file bankruptcy and I still saved money and stopped the bleeding.

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However, you also do not have to qualify for Chapter 7 bankruptcy to qualify and be insolvent.
I think we've had this discussion before, so I probably need to rephrase my remarks.

Let me put it this way...

A quick and dirty way to decide if you qualify for "insolvency" under the IRS rules is to determine if you qualify for a BK 7 without using your state exemptions. You don't have to file BK 7...just qualify. The NOLO book on bankruptcy is a much easier read than the IRS regulations. However, if you do want to go through the exercise of totaling up ALL of your assets and figuring out ALL of your liabilities, please note that it must be as of the time you receive the 1099c (not at the time you defaulted) and that you stand a very good chance of being audited by the IRS, so make sure your records are complete.

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Under the new bankruptcy laws even people who are insolvent may not qualify for Chapter 7 due to their income because they have to meet the median income requirements for their state, they then file for Chapter 13 if there income is over the median income and the judge determines which creditors and how much they will be paid. So people who could file Chapter 13 would also qualify - and willing and I have had this discussion before and I'm afraid people will think just because they can't file Chapter 7 they can't file as insolvent; I guess I don't believe in the analogy and people will be scared into filing bankruptcy versus settling their debts because of tax implications which may not exist. The only sure way to know is to do your research and talk to an accountant or an H&R Block representative.

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And, conversely, people whose liabilities exceed their assets may not qualify for IRS insolvency because of their income.

So...I agree...before you decide to do either (file BK or ignore a 1099c because you're insolvent) get the advice of a tax lawyer or BK lawyer.

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