Settlements, DMPs and Form 982, Part 3
By Eugene S. Melchionne, Connecticut Bankruptcy Attorney on May 17, 2007 in Connecticut, General Bankruptcy Information, Tax Issues
In two privious posts, we discussed credit counseling, settlements and DMPs. See Credit counseling and DMPs, Part 1 and What is a Debt Management Plan?, Part 2.
There is a hidden trap to paying less than what you owe. Under IRS rules, someone has realized income from the non-payment of that debt. This is logical, if you think about it. Consider what happens to that $5,000 cash advance if you do not repay it. didn’t you just get the benefit of $5,000? If the creditor doesn’t get repaid, or is repaid less than what you owe, the creditor has suffered a loss and you have realized a gain. That is taxable income.
So when you settle a debt for 40% of the total balance, expect to receive a Form 1099 showing that you received income for the other 60%. This is the hiden trap of settlement plans or DMPs, if you pay less than what is owed. At the end of the settlements or the DMPs, you will owe the IRS money. Which would you rather owe money to, Visa or the IRS?
Bankruptcy can help you avoid this trap. When you discharge a debt in bankruptcy, you have not realized income. Since you have gained nothing by being broke, you pay no taxes. See Tax Time & the Discharge of Debt. In order to avoid the income trap, you must file a Form 982 from the IRS.
If you liked that post, then try these...
Well done bankruptcy schedules defeat IRS lien by Cathy Moran, California bankruptcy lawyer
Surrendering a California Home in Bankruptcy. How Much Time? Part 1 of 2. by Michael Doan
Bankruptcy: When do I get my Property Back? by Michael Doan
You must be logged in to post a comment.