How to deal with 1099-C bad debt

Wow! Is that a raw deal. Some friend. Proves the old saying: "No good deed goes unpunished."

Unless you (like your friend) were also insolvent, the $2285 on the 1099-C is additional income to you. Some friend, eh?

wrote

You don't have bad debt unless he listed you in his bankruptcy petition. If he didn't, you have to go after him in small claims court and then you have to exhaust attempts to collect from him. You need to discuss this with an attorney.

I was 8 years old when my father first told me "Never cosign a loan and never post bail for someone." He repeated it every time he heard of someone being shafted by doing so.

Dick

wrote

You don't have any "bad debt" because you can't prove you loaned money to your friend. You may have to talk to an attorney, but see if you can formalize the "loan" to your friend, and then try to collect (they probably didn't list you as a creditor) for that debt, even taking it to court. You may then be able to deduct the "bad debt" amount for the full $7285. In the mean time, you have $2285 of income to report on your tax return. You don't say, but I hope that your friend is now an ex.

-- Paul Thomas, CPA snipped-for-privacy@bellsouth.net

Don't tell me -- his name was Polonious Adams?

Moderator: His son may be Polonious, but he was Perspicacious.

The debt of a guarantor is *not* a debt the forgiveness of which gives rise to taxable income. See, specifically, the instructions for Form 1099-C, which say to *not* prepare a

1099-C for a guarantor. The 1099-C that was sent to you should *not* have been prepared or sent. The lender didn't care enough about you to know and apply the rules that he's supposed to know. Write the lender a nasty nasty letter, and leave the "forgiven" $2,285 off your tax return completely. It's not taxable income.

You may or may not be able to get a deduction for the $5,000 you paid. If you don't claim it, I guarantee you won't get it as a deduction...

Moderator: There is a legally significant difference between being a co-signor and being a guarantor. Being a co-signor, may make the OP a multiple debtor (I hope not). I agree with your cite and the common sense of your opinion, but I'd like to read a legal opinion about the consequences of debt forgiveness on a co-signor vs. a guarantor.

I recall this from Business Law and have tried to use it and other nuances on several ocassions.

A cosigner is a backup creditor at the payment level. If the primary creditor does not make a payment on time, the second notice also goes to the creditor.

A guarantor aand a surety are legally interchangeable terms except they refer to different situations. A guarantor guarantees payment after the creditor has exhausted collection procedures. A surety guarantees payment against performance or malfeasence(sp?).

Guarantors and sureties have numerous rights unavailable to a cosigner. The most significant (at least IMO) of these rights is contract modification voids the guarantor agreement.

I agree with LoTax that a cosigner should be treated under tax law the same a guarantor/surety, but I'm not sure that is how the text reads. But I would push the issue here and challenge the 1099-C.

On three ocasssions, I offered to be the paid guarantor for the first 20% of the original mortgage a house and not once was it accepted because the lender insisted on a cosignor or a direct deposit of funds.

I have signed numerous contracts 'without recourse' and only once did someone object.

Dick

I haven't had occasion to research the issue, but that would be my off-the-top-of-the-head conclusion as well. The reason forgiveness of debt is taxable is because receipt of the money that created the debt was not taxable on receipt, even though a benefit was obtained. So when a debt (or part of a debt) is forgiven, it makes sense to make taxable the funds that were received but now don't have to be repaid. A guarantor was not the person who received the original funds and had no personal benefit from them. So when part of the debt is cancelled, the guarantor has received no benefit that was not taxed, so should have no income. If there's a 1099, it should go to the original debtor, not the guarantor who paid off the loan. Stu

The instructions are not quite that strong. They say the

1099-C is not required, as contrasted with saying do not prepare.

Here from Page AC-4 of the 2005 1099-C instructions:

1. Guarantor or surety. You are not required to file Form

1099-C for a guarantor or surety. A guarantor is not a debtor for purposes of filing Form 1099-C even if demand for payment is made to the guarantor.

__ Art Kamlet ArtKamlet @ AOL.com Columbus OH K2PZH

Here's a fellow who did a favor and co signed on a credit card. There is no evidence that he benefit or even used the credit card to buy goods and services. If he HAD obtained some kind of value from this arrangement, then he could be said to have had a benefit, which when forgiven should be taxable. But not in this case.

LoTax has the rights of it.

ChEAr$, Harlan Lunsford, EA n LA

I like Lo Tax's approach. While perhaps legally he co-signed a credit card, clearly the de facto arrangement was one of a guarantor. That is, I am sure he never used the card, nor was the credIt made available to him. However, simply leaving it off his return will result in a CP-2000 notice. So somehow he must include it and net it off. In addition, I think the $5000 could be treated as bad debt. This is under once again the implied understanding between the two parties that the bad debtor would reimburse him for any losses he assumed. I would contact an attorney explain the situation to him, and have him/her write you a letter that advises you that it is not likely you will prevail in court (since there's nothing in writing) and your "friend" is most likely judgment proof by this point. One compromise would be to report the 1099-C but report the $5000 bad debt loss (limited to $3000) and basically it's a wash for tax purposes. At least this won't cause a CP-2000 report.

Charles Markam,MST, EA Norwell, MA