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Paying Old Debt Included in BK

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Contributor

Paying Old Debt Included in BK

Going on a tangent, but curious...
I know with a c/o, you'd have to pay taxes on that amount as it gets "added" to your income for that year, as the debt 'forgiven' is viewed as a gain in income. Does that happen with a bankruptcy as well?

Follow up question: say someone did have a charge off long ago and paid the taxes. But, similar to the OP, they want to repay the lender. Would you now be able to deduct that amount from your income during taxes?

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Regular Contributor

Re: Paying Old Debt Included in BK


@Rebuilt wrote:
Going on a tangent, but curious...
I know with a c/o, you'd have to pay taxes on that amount as it gets "added" to your income for that year, as the debt 'forgiven' is viewed as a gain in income. Does that happen with a bankruptcy as well?

Follow up question: say someone did have a charge off long ago and paid the taxes. But, similar to the OP, they want to repay the lender. Would you now be able to deduct that amount from your income during taxes?

It doesn't work that way.  A creditor charging off a debt does not create a 1099 to the debtor.     If the debt is forgiven or if part of the debt is forgiven then it is possible but still may not always occur.

 

As for a BK(and here I will admit I am less familiar with the workings of a BK) - it depends on whether or not a 1099 was created before the BK - and if it wasn't the debt would be discharged and no 1099 to follow but circumstances and situations may vary but in general - still no 1099.   

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Contributor

Re: Paying Old Debt Included in BK

@Lucifer:
I've seen an old private student loan get written/charged off by a bank about 3 years ago. They received the 1099 forms during tax time and had the ~$15k added to their income & had to pay the taxes.
So I thought that was the norm. Maybe it's just more normal to happen so promptly over here in "tax-residents-to-death-for-corrupt-spending New Jersey?"
If the debtor receives the forms, the creditor is able to write off the loss from their income for the year.
I think this happens if the bank writes it off completely & doesn't sell it to a collection agency?
But, regardless of how exactly it arrived, say the person did get the 1099 and years later paid back the debt for deletion from their credit report. Are they then eligible to write off that amount (perhaps there's some kind of time limit to all this)?

Message 3 of 6
Regular Contributor

Re: Paying Old Debt Included in BK

There is probably more to that story.  A charge off is an accouting tool for businesses that when used, creates a deductible expense for the creditor but does not eliminate or forgive the debt itself for the debtor.

 

Ultimately, if there is a pressing financial concern for such a topic it would be best suited for an accoutant which I am not (even though I did stay at a holiday inn last night).

 

 

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Valued Contributor

Re: Paying Old Debt Included in BK

Don't waste money on old debt that is long gone. Invest it in your future instead.

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Valued Contributor

Re: Paying Old Debt Included in BK

IRS Code says debt discharged in BK is not reportable as income... 1099-C BEFORE is
However you can get arround by filing insolvency paperwork if you qualify.






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