Receiving a 1099-C impacts your credit report and score and also has federal tax consequences.
Have you ever received a Annex 1099-C because you have had part of your debts canceled? If so, how does this relate to your credit report?
I am a Michigan State University Extension foreclosure counselor, and several clients I have worked with had canceled debts and the debt still appeared on their credit reports as collectable. Sometimes, even when the debt has been written off, the lender may not have reported it to the credit bureaus. The debt may even have been sold to a debt collector. If this happens, the creditor may have no legal right to collect once the debt is canceled and a Schedule 1099-C is issued. It is best to discuss your personal situation with a consumer protection lawyer if you cannot resolve the issue on your own.
The Form 1099-C refers to debts that have been forgiven by creditors. It is also known as “debt cancellation”. According to the IRS, lenders must complete this form for each debtor for whom they have forgiven $ 600 or more of a debt owed to them. A 1099-C is sent when a consumer settle a debt with a creditor, or the creditor has chosen not to attempt to collect a debt. It is important to know that when a creditor no longer attempts to collect the outstanding principal balance of a debt, they must report that amount to the IRS.
An important point to understand is that debts canceled or settled are not the same as debts that have been “paid in full”. If you have paid off your debts, they will appear on your credit report and will be considered pejorative because it basically means that your loan is in default. This information can stay on your credit report for up to seven years.
If you are able to completely write off your debt, then you no longer have any responsibility for the amount owed. But the creditor must declare the amount canceled or installed Debt to the IRS using Form 1099-C Debt Cancellation. The amount that was written off is now considered income for you and should be reported as such on your tax return.
Advice: Keep in mind that you can pay off your debts all alone. Paying a business to do so only takes more money out of your pocket that could have been used to pay off some of the debt.
If, at the time of your debt cancellation, you had negative equity, you could be considered insolvent. This gives you the option of checking whether you should report all or part of the charge to the IRS. it would be necessary to deposit IRS Form 982, Reduction of tax attributes due to debt payment, if you wish to benefit from the insolvency exemption.
Considering all of this, it can always be a very good idea to settle some or all of your debts. As long as you understand that this will technically increase your income resulting in a lower tax refund or put you in a situation where you have to pay additional federal income tax. Of course, always consult a tax expert with tax issues.
If you and your family or someone you know are struggling with creditors, there are resources available to help you. It’s hard to talk about money issues, and it can be hard to put your situation into words when dealing with creditors. The MSU extension website MI Money Health has many tips and sample letters to write to creditors. Families need to be honest about their situation and have a reasonable plan that they can afford. Also, it is important to get any agreement in writing.
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