Settling debt with your credit card companies WITHOUT having to report it in your tax return?
I’ve been reading a lot about this because I’ve been trying to figure out how to go about settling my debt for much less with all my credit card companies and then just paying them off in full with the amount that’s left after the settlement (they are all in collections and have been for months). What I didn’t know until I started researching this, was that in some cases you do have to report this as income on your tax return. I definitely DON’T want to have to do that. So, two questions. One, what are the guidelines for being eligible to NOT have to report it? And how could I be 100% sure that I won’t have to fill out a 1099? Who would I talk to professionally about this before I decide to pay the debts off, and would I have to pay for their services? I need to do something about these cards soon, whether it’s pay them off or make a payment. Second, if for some reason I would have to report it on my tax return because I wasn’t eligible for not having to report it, is there anyway I could pay it off in full without negotiating a settlement, but still have them lower it? What I mean is, have them possibly take off all the fees that have accrued over the past several months, but not necessarily cut it down to 30-40%, so that it won’t be a settlement that will have to be reported.. so that the lump sum I pay them will be less than if I had to pay what the bills say are due right now. Also, any tips for negotiating with these people? I’ve never done this, only heard and read of several people who have. What do you say, how do you negotiate, how do you tell them you can "only pay X amount", etc. etc. and if I did settle in the end, how would I go about obtaining that statement that I needed to say from them that it was actually settled and paid in full? Do I make sure I get that before I pay or after?
Okay, also, so regardless of whether they settle it for less than 0 or more than 0, I still have to report it as ‘other income’ on my return? And if the amount I settle for is LESS than 0, I just don’t have to pay any taxes on that?
There are several ways to handle this. The first way is to settle for every thing you owe except for $599. They are required to send you a 1099 for debt forgiveness if the debt they forgive is $600 or more. Now the good thing (not so good in situation) is that if you are insolvent at the time of the debt forgiveness, you don’t have to pay tax on the forgiven amount. What you would do in this instance is when you report the debt forgiveness on your other income, you would just subtract out the exact amount and report as insolvent. It would be best to look at irs.gov in order to determine if you meet the insolvency guidelines.
May 28th, 2010 at 9:59 amAs far as dealing with the credit card people: they would rather get something instead of nothing. If you tell them you want to settle, and how much you can pay, and that this is your last step before filing bankruptcy, they will more than likely settle. If you file bankruptcy, they will get nothing, because credit cards are unsecured. Tell them to send you a settlement letter so that you can pay the agreed upon amount and do not make any payments over the phone.
any amount foregiven by credit card companies will be reported to IRS on a 1099. They prepare the 1099 not you. That is income to you. You will pay tax equal to about 15% of amount foregiven.
Not bad. 85% of that foregiven debt is free money.
May 28th, 2010 at 9:59 amFirst, you don’t fill out the 1099, the lender does and then sends a copy to you and a copy to the IRS. If you settle for a lower amount, they will do the paperwork and report it, otherwise, it is tax fraud – unless the negotiated settlement is for $600 or less (i.e., if you owe $2,000 and settle for $1,500, it does not have to be reported by the lender). And no, you can’t settle and have them report as paid in full but send a lower balance – their books won’t balance and their auditors will have a field day writing them up for violations. Either the difference gets written off as a settlement or you pay 100%.
May 28th, 2010 at 9:59 amThe 1099 is required by law.
May 28th, 2010 at 9:59 amIt is considered income because you spent money that you no longer have to pay back under loan provisions. That’s the definition of income and is correctly recognized as just that.
You would be very unwise to refuse a reduced settlement just because of tax reasons.
If the account is still with the original credit card company, you will get a 1099 for the forgiven portion. However, if the account has been sold off to a collection agency, you may not get the 1099. The collection agency bought the debt for a deep discount. Accepting a settlement for less than the full balance would still be more than they paid for the debt.
You are more likely to get a collection agency to accept settlement for less. If the debt is over 3 years old, offer 25%; 2 or 3 years old, offer 50%; less than 2, offer 75%. Lump sum gets the best deals. Payment plans must be short term — less than 6 months. Get any settlement agreement in writing before you pay a cent. Keep that agreement and your payment proof, forever. Do not give the collector direct access to your bank account.
May 28th, 2010 at 9:59 am