topic 1099-C inquiry in Rebuilding Your Credit

1099-C inquiry

Anonymous — Sat, 06 Feb 2016 03:00:53 GMT

I settled an old debt with Galaxy international last year. Debt was about $800. Settled for about a third or around 250. I just received a 1099-C in the mail for the whole $800, with the description stating that this was the cancelled principal balance. Is this right? Should they be sending this even though i settled?

Thanks for any assistance.

Re: 1099-C inquiry

Anonymous — Sat, 06 Feb 2016 04:14:34 GMT

Yep, the amount forgiven is considered taxable income (as the lender essentially gave you their own cash to pay off the full balance). Because you got a 1099-C, it means they notified the IRS. You need to include it on your taxes as income. If you don't, the automated IRS system will generate a letter/bill to you (often with penalties and interest).

That said, if the full debt was 800, and you settled for 250, the 1099 should only show 550. If you think the creditor entered the wrong number, you need to contact them to have it corrected. Unfortunately the IRS deems whatever the creditor says as the accurate number.

I learned all of this last year after I settled a 4k debt for 1k and had to pay an extra $700 in taxes at the end of the year.

Re: 1099-C inquiry

Anonymous — Sat, 06 Feb 2016 04:18:41 GMT

Damn, i did not know this. I've settled other collections previously and never received a 1099-C. I'll contact them to correct the principal balance.

Re: 1099-C inquiry

Anonymous — Sat, 06 Feb 2016 04:42:03 GMT

If it ends up being less than $600 they aren't required to report it to the IRS.

There are also ways to avoid paying tax on it. Easiest one is if all your debts are higher than all of your assets, you are considered insolvent and are exempt from the tax on debt forgiveness (but you'll need to file an extra form proving that)

Re: 1099-C inquiry

RobertEG — Sat, 06 Feb 2016 06:06:28 GMT

There is not IRS tax obligation unless the cancelled debt is $600 or more.

Once you get the 1099c corrected, you will not have a tax obligation.