Do the debt collectors report the written off debt to the IRS?

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Do the debt collectors report the written off debt to the IRS?

We owe $30,000 on a Chase Visa card. The debt collector told us that if we settled for $10,000, they report the $20,000 that they had to write off to the IRS as our income, and we would have to pay taxes on this amount. Is this right?

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Do the debt collectors report the written off debt to the IRS?

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Mar 14, 2010

Debt collectors reporting written off debt to IRS
by: Mary and Gerri

Thanks for submitting your debt collection question on our Q&A page.

Congratulations on working out such an attractive settlement on your Chase Visa card. Unfortunately however, the debt collector is correct. He is legally obligated to report the $20,000 he has agreed to forgive to the IRS on a Form 1099-C, and the IRS will treat that money as taxable income. In other words, when you are doing your federal taxes, you'll have to include it in your total gross income for the year. However, whether or not the forgiven amount will actually cause you to owe more taxes will depend on a variety of factors, including the amount of the rest of your income, your exemptions, deductions and tax credits, among other things.

We recommend that if you receive a 1099-C, you contact a tax professional right away (either a CPA who specializes in taxes or a tax attorney) because if you can prove to the IRS that you are insolvent (or if you have filed for bankruptcy), then you may not have to pay taxes on that "income." If you do, the tax professional may be able to help you figure out ways to reduce the total amount of taxes you owe.

Good luck!

Mary and Gerri

Oct 15, 2011

What to do when you recieve a 1099-C
by: Ms. Noital

Go to the irs.gov site and read Publication 4681 for complete information on how to handle canceled debts, etc. If can show your assets are less than the amount cited on the 1099-c you can claim insolvency.

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Do the debt collectors report the written off debt to the IRS?

Comments for Do the debt collectors report the written off debt to the IRS?

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Do the debt collectors report the written off debt to the IRS?