Do you know what happens when you fall behind in clearing credit card cue? After a certain period of time your file is sent to a collection agency which resorts to bullying tactics to recover the full balance. It never helps to run away when you are not able to meet your dues.
Treatments for Forgiven Debts -1099 C and You
Always try to pay 40% of the original sum. If this is done, collection agencies will set down with you for alternative arrangements. Once the agreed amount is paid off, the creditor will issue a 1099-C. This serves as a notice of forgiven debt to the IRS. What you save after paying your due is to be shown as an income while filing the taxes. If this money remains unaccounted, then in a couple of years, the IRS may issue a bill with penalties and interests.
Like wise if your home has been foreclosed and you sell your property for an amount less than the loan then the mortgage lender will issue a 1099-C. Without this the owner will have to face a tax bill a couple of years later. All this means it is mandatory to show the savings after the debt is forgiven while filing taxes.
Forgiven Debts Tax Consequences
In which cases does it not matter to show canceled debt as an income?
Bankruptcy – this is because the debts were discharged through a bankruptcy proceeding.
Insolvency – When you get yourself declared insolvent, the total amount of your debts exceeds your total assets. At this time your total debts are considered to be settled or deemed non-collectible. However when filing the tax return, you must explain your insolvency to the IRS.
Remember not to ignore 1099-C. If not this may result in a tax assessment by the IRS for any amount over $600 plus penalty and interest.