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The truth about being INSOLVENT...ChrysHenderson please read





Sub: The truth about being INSOLVENT...ChrysHenderson please read
Wed, 13/04/2011 07:51

Okay, on another post I think that there was some confusion or fear about having to claim money saved from debt settlement as income earned on your taxes. I would like to clarify and also reiterate some things about that.

Debt settlement is a much better solution for a great majority of us. We all know that here. What isn’t commonly known is that creditors are required to report forgiven debts greater than $600 to the IRS on form 1099. This notifies the IRS that you have settled your debt for less than full balance. Here’s the thing: the IRS views this cancelled debt as taxable income and wants you to pay taxes on it.

Don’t freak out though - there is a bright light in this dark tunnel for MANY of us that see debt settlement as the best or only way out.

The truth is that many of us who choose to go the debt settlement route are NOT liable for taxes on the forgiven debt. The IRS gives an out for debtors who are “insolvent” at the time of debt settlement. The term "insolvent" does NOT...I repeat NOT only apply to people filing bankruptcy!!!

The term “insolvent” simply means that your debts exceed the value of your assets. If you are in a situation where a debt settlement is necessary, you are probably insolvent. In other words, you would have a negative net worth where your liabilities outweigh your assets.

So How Do you figure out if you are insolvent?

At the end of the year, you’ll get a 1099-C from the creditor with which you settled. The 1099-C will usually have a DATE that your debt was cancelled, and it should match your records with the time you settled and actually paid your creditor.

This cancellation date is important because that’s the point of reference to determine your solvency. List all your assets and liabilities(debts) AS THEY STOOD ON THAT DATE. Use market value of your house and cars to determine their value as an asset. To determine your home's value you can use a site like zillow or some of the other ones that give free desktop appraisals simply by typing in your address. They include comparable values (surrounding home sales) so the estimate should be pretty accurate. There are also great sites out there to help determine the value of any cars that you own free and clear.

If your debts exceed your assets for that date in time, and the amount you are insolvent to exceeds the cancelled debt amount, then you can declare yourself “insolvent” for that settlement. If you settled more than 1 debt, you must repeat this process for each cancelled debt.

IMPORTANT!!!!! :
To let the IRS know about your insolvency, you must fill out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness. You would then attach this to your 1040.

If you determined that you were insolvent on your debt cancellation date, then you need to attach some documentation. According to the IRS phone support rep, a simple spreadsheet showing your assets and liabilities like this will suffice:

-------------------------------------------------------------
List of Assets and Liabilities

1099-C Creditor: American Express
Cancellation date: 03/27/2008

Debtor: Joe Schmoe
SS#: 123-45-6789
Tax Year: 2008
Loan Balance: 7890
Amount cancelled: 5623

ASSETS:
House: 150,000
Car 1: 5,400
Car 2: 3,200
Check.acct: 364
Savings acct: 0
Household items: 2,200
____________
Total assets: 161,164

LIABILITIES
Mortgage: 124,000
HELOC: 4,200
Credit card debt: 46,000
_____________
Total liabilites: 174,200

174,200 in Liabilites
-161,164 in Assets
= 13,036 INSOLVENT

I was insolvent to the amount of $13,036 on 3/27/2008, which exceeded the cancelled debt of $5623, therefore, I am not including the amount reported on the 1099-C on my tax return.

-------------------------------------------------------------


You should do this for each cancelled debt for which a settlement occured in the given tax year.

If you determine that you would not be considered insolvent, keep in mind that the amount you settled on added to the taxes you will owe is STILL much less than what you would have paid to the creditor in the long run. Especially if you had gone on paying minimum payments! Chances are that the interest alone on the payments you would have made far exceed the amount of taxes assessed.

Either way, you save money, eliminate your debt and get to sleep at night. You still won by settling your debt.



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Unregistered

Sub: #1 Business CCWed, 04/13/2011 - 07:51



Would this apply to business credit cards as well?


Kat1975
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Sub: #2 Thanks Dan, I knew there was a deadline but wasn't sure. I will Fri, 01/07/2011 - 17:55



Thanks Dan, I knew there was a deadline but wasn't sure. I will wait until the end of Feb to file since mail is taking a week or longer to catch up with us..
With my home under water etc when I settle I'm insolvent. Home is in foreclosure now so guess next year I will have to go the route of the mortgage forgiveness paperwork!.
For the first time in years I'm debt free, now if my health would improved and I could go back to work life would be really good!


dantheman
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Sub: #3 No later than January 31.Fri, 01/07/2011 - 15:19



No later than January 31.


Kat1975
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Sub: #4 When are we suppose to receive a 1099-c? I settle last June and Fri, 01/07/2011 - 12:06



When are we suppose to receive a 1099-c? I settle last June and so far nothing? I have moved so with thing being forward it may take longer.
Plus if it bank or collection agent never files with the irs do you still have to claim it as income and how would we know if it was file or not?


Sub: #5 Very good! Very informative for this forum. We settled 9 cards aSat, 01/01/2011 - 09:42



Very good! Very informative for this forum. We settled 9 cards and received 1099s on all that we settled on with the OC. We kept a running spreadsheet as we settled of our assets and liabilities so we had a snapshot of them at each date. Then there was no trying to remember. Our situation changed too as we had a total loss on a vehicle half way through that changed our balance sheet.

When we were 1099ed, we just referred back to the spreadsheet, filled out our 982 and filed accordingly. We settled about 75K for a third of that overall and never paid taxes on any of that that was forgiven!


dantheman
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Sub: #6 I do not believe that is correct. The way I understand the timThu, 12/30/2010 - 17:58



I do not believe that is correct.

The way I understand the timing is that for each settlement you take a snapshot at the time of settlement/forgiven debt. So that would include all assets and all liabilities as of immediately BEFORE the settlement. If the liabilities exceed that assets, you are insolvent at the time of settlement. Additionally, if the settlement makes you solvent, then you receive the deduction to the point of solvency.

The IRS seems to be looking at what your situation was before you settled for tax purposes. If anyone has other input that is not just a guess, please add it. But this is what I have learned.


Unregistered

Sub: #7 Under the liabilities section, you will have to list the total cWed, 12/29/2010 - 23:36



Under the liabilities section, you will have to list the total credit card debt minus the one you just settled.


Sub: #8 my question on this issue is... in the liabilities section, undeWed, 12/29/2010 - 21:32



my question on this issue is... in the liabilities section, under credit cards- do you include the balance of the credit card/loan you just settled or the total credit card debt minus the one you just settled?


Unregistered

Sub: #9 I, too, am looking at a foreclosure this year and am scared to dMon, 12/27/2010 - 21:06



I, too, am looking at a foreclosure this year and am scared to death. I was set to file bankruptcy this year, but luckily learned of a proposed inheritance from my mother which is sizeable, so high ho, high ho, off to a tax lawyer I go. I learned of some sense of salvation where indeed my house is gone, but I do not have to walk away from my other debts, and can depart with some dignity. I am letting the house go, not jeopardizing what my mother was able to put away for myself and my siblings, and will be claiming insolvency. It took me many hours of research, and an explanation by a CPA/tax attorney to put my mind at ease in working out my finances to arrive at the realization that when the house goes into foreclosure I will be eligible to claim insolvency, protecting my mother's gift to me. It is a huge relief because I now have hope again. I was living a pretty sad existence after 9 modification attempts with no resolve with the bank. Never, ever a big bank customer again in any kind of way, NEVER!!!


dantheman
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Sub: #10 I am not an expert on this but need to be this year, with $120k Wed, 04/21/2010 - 11:56



I am not an expert on this but need to be this year, with $120k in "forgiven" cc debt and a short sale to go. The rule states that if a portion of the debt is "written off" by the creditor they can send a 1099c but even if they don't it is considered income. The IRS always gets you. I also believe that in order to take the loss for this money, the cc must do this. The IRS accounts for everything. If somebody gets income, somebody gets a deduction. If somebody gets a debt forgiven, somebody else gets income. There is always the other side of the accounting equation with them.


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