Credit Card Debt Forgiveness – When Will your Creditor Arrives
You have received a letter in the mail from your credit card company that it has accepted your offer to pay $5,000.00 to settle your outstanding debt of $12,000.00. You are elated that you have been able to achieve credit card debt forgiveness. But wait a minute before you throw a party to celebrate. You need to think about the IRS who just might be sending you another letter informing you of taxes owed on the $7,000.00 debt forgiveness you received.
Yes, that is right. Companies who forgive debts in excess of $600.00 are required by law to report the amount of debt forgiven to the IRS on Form 1099-C. You are then supposed to pay income taxes on that amount as the IRS views it as income to you. Of course, if you have losses or expenses to offset the taxes, then this may not be a problem for you but you will want to consult with a competent tax authority to make sure you handle this matter correctly.
There are two exceptions to this outcome. One is if the debt is forgiven in bankruptcy. The other is if you are insolvent which means your liabilities exceed your assets. If either of these apply, you will need to file IRS Form 982. However, you can only exclude the amount by which your liabilities exceed your assets. Say that you have assets of $250,000.00 and liabilities of $255,000.00. You will be able to exclude only the $5,000.00 by which your liabilities exceed your assets which means you will have to pay taxes of $2,000.00 of the $7,000.00 of credit card debt forgiveness. A person in a 30% tax bracket will enjoy savings of a whopping $1,500.00 if the exclusion applies.