tax on debtors

The only thing I can think of is that if he works out a settlement with the credit card companies for less than he owes he could have taxable income equal to the forgiven debt. See IRS Publication 525.

Some other thoughts.

Absent unusual circumstances, your friend managed to run up $150K in debt while unemployed because he couldn't live within his means before he was unemployed, and it just got worse. Unless he's reformed, he needs a severe budget and a big reduction in lifestyle.

If he's self-employed, with or without employees, and fixated on reducing debt he's at risk for shifting the debt from credit cards to the IRS. He has to have the discipline to make estimated tax payments (and payroll taxes if applicable) as they come due. That means socking money away as he earns it and keeping it someplace where he can find it when the tax bill comes due.

"z" wrote

Not that impact someone who is paying off their debt.

I'm curious: does this apply to interest and fees, as well as the underlying charges?

If they were added to the principal and became part of the canceled debt, yes.

However, if the debt would have been deductible had it been paid, then it is excluded from income when canceled. This is most likely not the case with credit cards.

-Mark Bole

snipped-for-privacy@pacbell.net (Mark Bole) posted:

For some reason, this prompted me to wonder whether the ultimate weapon for a vindictive Credit Card company, might possibly lie in punishing those who declare bankrupcy, by responding with a "forgiveness" of debt, and the ensuing 1099 report of this "cancellation." If so, I wonder what effect that would have on the TP involved. Nothing good, I'm sure.

I'll confess this thought occurred to me, because I once tried to bail out a relative by negotiating a discounted settlement of CC debt, with my pledge to provide cash to directly settle the reduced balance (which would simply erase all interest and late charges -- which amounted to almost half of outstanding balance). Several issuers were totally agreeable, but they warned me if one particular issuer were involved, they would probably insist on the bankrupcy proceedings.

Turned out they were right. That one company blew the deal, and ended up costing all of the debtors I felt what was a most reasonable settlement. I won't name them, but it surely dumbfounded me, that they would "bite off their nose to spite their face." (And no, they didn't have the largest piece of the pie, either!)

So that's the reason the thought of a vindictive CC company popped into my mind. (BITD when my experience took place, there was no

Bill

No effect to something pretty good, actually. Since the debt was discharged (I assume) by the bankruptcy there's no cancellation of debt income. Plus, the creditor issued a false 1099-C, which creates a Federal cause of action for the debtor.

Cancellation of debt is not considered taxable income if the person is insolvent at the time. If bankruptcy is filed issuance of a 1099 should not result in taxable income, though an explanation may have to be made to the IRS.

Some think that they will come out ahead over all by taking a stand like that, because they think most threats to file bankruptcy are hollow.

Stu

just insolvent at that time, or you go through bankruptcy? A person can overcome insolvency, even without bankruptcy.

If bankruptcy is filed issuance of a 1099

"Gil Faver"