| It is said that there are two things modern man cannot | | | | Service will send a bill for payment complete with |
| escape no matter how wealthy, how handsome and | | | | penalties and surcharges. Yes, indeed, as sad as it is, |
| how blessed he is - death and taxes. Many times has | | | | you might just have to pay an amount greater than |
| it been proven and it will be proven once again when | | | | what you have been forgiven by the creditor in the |
| you have to pay taxes for your forgiven debts. | | | | first place. |
| You must never fall into the trap of thinking that when | | | | Applicable Amount |
| you have negotiated, settled and paid for a fraction of | | | | And speaking of applicable amount, Form 1099-C is |
| your total debt that everything is forgiven and | | | | applicable to any forgiven debt amounting to $600 and |
| forgotten - not for the Internal Revenue Service it is | | | | above. Anything below this amount is not taxable and, |
| not! This is because the forgiven debt - the amount | | | | hence, may not be declared in your tax return. |
| cancelled by the creditor - is considered as income for | | | | You may, however, avail of the insolvency exclusion |
| taxation purposes. | | | | clause of the law that allows for no taxes on forgiven |
| Cases of Forgiven Debts | | | | debts in specific situations regardless of the amount |
| The most common instances of forgiven debts are on | | | | thereon. It must be emphasized that the exclusion may |
| credit cards and home mortgages. For credit cards, | | | | be partial or total depending on your case. These |
| you can negotiate with the lenders to pay around | | | | insolvency exclusions include the following: |
| 30-40 percent of the total balance payable in a | | | | * Your net worth - fair market value of assets |
| process called debt relief. When you have paid your | | | | deducted by the face value of your liabilities - reveal |
| negotiated debt in full, your creditor will then fill out the | | | | that you are indeed insolvent and, hence, unable to pay |
| IRS Form 1099-C and file it with the Internal Revenue | | | | for the tax on the forgiven debt. Said insolvency must |
| Service. | | | | be at the time your debt was settled, not during the |
| This is also what happens when a foreclosure on your | | | | time when the Internal Revenue Service is collecting |
| home happens and the mortgage lender sells the | | | | taxes for the cancelled debt. |
| property for less than the amount of the loan still due | | | | * Your debt was discharged by virtue of a bankruptcy |
| and demandable. Again, the mortgage lender will file | | | | proceeding. |
| IRS Form 1099-C. | | | | * Your debt was borne of a qualified farm expense. |
| Roles of the Parties | | | | * Your cancelled debt can be attributed to business |
| It must be emphasized that it is the creditor that files | | | | losses in real property |
| the Form 1099-C, not the debtor. The creditor is simply | | | | * Your debt was forgiven and explicitly considered a |
| notifying the Internal Revenue Service that a forgiven | | | | gift. |
| debt has been made. Beyond that, the creditor has no | | | | When it comes to debt and taxes, you should never |
| control whatsoever over the process. | | | | disregard the consequences mainly because the |
| The debtor, on the other hand, should acknowledge | | | | Internal Revenue Service will be hounding your steps. |
| the forgiven debt on his tax return and pay taxes on | | | | Better yet, consult a lawyer and accountant on the |
| the applicable amount. Otherwise, the Internal Revenue | | | | matter. |