1099-C Form for Cancelled Debts Question

[RehabbingANDBlabbing]

I think a lot of people come to MyFico to improve their credit (which I am here to do as well), but it’s not my primary goal. I want to get out of debt and be able to do what I want to do with my life. I don’t care about Chase or USAA ever loaning me money again. All in all, I had nearly $80k in credit card debt when I started getting out of this hole 2 years ago. I still have $38k in student loans, which take a while to pay off when you are settling other debts. Mine are consolidated and at a reasonable rate though the government. I just have to finish my higher rate debts first and then all my extra income can go towards those. We haven’t even settled any of my husband’s debts, but no one has tried to sue him. We have 2 more years before the SOL is up on the remaining debts. We may settle his if we have to, but for now, I think our best move is to just wait it out and pay off our open credit cards (about $10k) and pay off our student loans. He probably has another $80k in debt that would need to be settled, which means we would probably have to come up with about $40k. Now that I’m done settling my stuff, we can just pay off the open cards over a few months and then start the student loans.

[Anonymous]

We were able to claim insolvency on our tax return after having to take a giant loss on a car loan with Capital One. We had to sell the car in order to close the loan and 0 it out before we could buy our first home. Capital one sent us a debt cancellation 1099-c for $18k. I had student loans that I calculated into the insolvency worksheet. This was back in 2016 so I can't remember off the top of my head if we had to claim the retirement account, or not, but it was not that high at the time. Maybe $12k, which still left us in debt with my student loans well over what we had in the retirement account. I was super nervous thinking I was doing it all wrong, but everything went through just fine and we did not have to pay taxes on the debt. I still don't know how that technically counts as "income" but rules are rules I suppose. Good luck!!

[Anonymous]

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@Jnbmom wrote:

How much debt was settled on? What amounts are we talking about?

I think you are referring to the "insolvency" rule, which is not as cut and dry as you may think.

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I am an IRS licened Enrolled Agent with 35 years of tax experience, and the Continued Insolvency exception under IRC 108 is pretty straight forward. You can exclude from income any discharged debt to the extent that you remain insolvent. Insolvent means you "owe" more than you "own".

If a client came to me with the OP's IRA issue, I would calculate the tax effect of taking money out of the IRA (including the Section 72t penalty if it applies) and subtracting that from the amount in the IRA. If you file separately from your spouse and do not live in a Community Property State, then you would only count the debt that you are responsible for.  In the event that both spouses have discharged debt and a large portion of that debt is either Community or Jointly owned, it could actually help to file separately, as each of you could take the full amount of the Joint or Community debt as a liability against your assets.

[Anonymous]

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@Shooting-For-800 wrote:

Hard to argue insolvent making over 100k.

How much does your spouse make?

What was your effective tax rate last year?

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This is a common misunderstanding of the Continued Insolvency rule. Income has nothing to do with insolvency - it is a Balance Sheet issue - assets and liabilities.

[Shooting-For-800]

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@Anonymous wrote:

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@Shooting-For-800 wrote:

Hard to argue insolvent making over 100k.

How much does your spouse make?

What was your effective tax rate last year?

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This is a common misunderstanding of the Continued Insolvency rule. Income has nothing to do with insolvency - it is a Balance Sheet issue - assets and liabilities.

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Yea, I understand.  I am pretty familiar with it.