1099 C forgiveness of debt is really income to you in the year the debt was written off. WHAT? You bet. A creditor is required by law to issue a 1009 C to any individual who settles a debt or has a debt written off that is in excess of $600. This is a very big trap that people with lots of debt find themselves in. If you have received one of those in the mail, you may have to declare the amount on that form as income. (see your tax person) Then you will have to pay tax on it.
Using a debt management firm to settle your debts? don’t be surprised when the 1099 C comes in the mail. House sells at foreclosure sale ,the bank has not been paid all the money. You should be on the look out for a 1099 C.
The 1099 c is required to be issued by any creditor that settles a debt, or writes the debt off and the amount is over $600. You settle your $5000 credit card bill for $3000. You will eventually get a 1099 c for $2000 and you will have to declare that as income on your return. You will end up paying tax on it. The balance left on the mortgage after your property is sold at sheriff sale or by a short sale. The mortgage company will issue you a 1099 C for the difference.
There are 2 exceptions to the 1099 C rule for most debt. The first applies when you are insolvent as the time the debt is written off. This is defined by the IRS. The second is if you file bankruptcy before the debt is written off and the 1099 c is issued, there is no income to declare. If you file bankruptcy after the 1099 C is issued you still have to declare that as income.
There is a third exception that is only good for real estate. It is the Mortgage Forgiveness Act of 2007. It applies to the homeowners of residential real estate only. It also only applies to homeowners who had the debt written off during 2007 to 2012. The IRS’s website has examples to help you determine if you can qualify for this exception.
The 1099 C and its consequences are often overlooked before making the decision to file bankruptcy. Its impact should be considered and can be reason to choose to file bankruptcy.
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