Beware of the IRS If Your Creditor Writes Off or Settles a Debt


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If Your Creditor Writes Off a Bad it Could Be a Taxable Transaction.

If a creditor writes off a bad debt and ceases collection and the amount of the debt is for more than $600.00, there is an IRS requirement that requires the creditor to report to the IRS the amount of the write-off on Form 1099-C which is the form that is used to report income. This means that you will have to report the debt that is written ff as income to you when you file the next year's tax return. Thus, if you didn't pay your credit card bill you and it is written off by the credit card company, you could find that you own income when you file your return.

There are several exceptions to this rule:

If you discharge the debt in bankruptcy it is not considered income.
If you are insolvent before the creditor write off the debt.
If the debt that is written off is considered a gift.

NOTICE: The decision to file bankruptcy is a serious choice. Bankruptcy is not for everyone. It is a drastic remedy that can affect your credit for many years and will affect your ability to use the bankruptcy code at a future time when you may need it more. The majority of chapter 13 plans are never successfully completed and the funds paid do not cure the mortgage arrears or allow redemption of property. Upon filing a bankruptcy you may lose control of your property and you may not dismiss a bankruptcy proceeding without court approval once it is filed. The decision of when to file a bankruptcy is also crucial and dependent on your individual circumstances. Be sure to discuss the potential pitfalls of bankruptcy as well as its advantages with any professional you are considering.