1099-C issues and canceled credit card debt in Florida
On behalf of Bankruptcy Law Firm of Clare Casas on Friday, November 7, 2014.
People in Florida who have significant delinquent credit card debt often receive offers of settlement for half or more of the balance. These offers normally offer to cancel the remaining debt owed for payment of the settlement amount. To many debtors, these offers seem like a way they can get out from under a mountain of debt and have some financial relief from bad financial situations.
People who accept these offers of settlement may not be aware that the IRS will count any amount of canceled debt of $600 or more as reportable income. In other words, settlements may result in an unexpected significant tax bill after the person believed they had gotten free from a bad financial situation.
This can effectively be a financial nightmare for those people who are unable to afford their credit card payments and facing collection actions. Settlements can be away to avoid such things as wage garnishments and judgments, but people may later find themselves unable to pay the resulting tax bill owed to the IRS for the canceled debt.
While credit card debt is normally eligible for discharge in bankruptcy, most taxes owed are not. Debts that are discharged through a bankruptcy are exempt from inclusion as income for tax purposes, making bankruptcy the better option for people in many cases. Credit card companies often do not disclose the potential tax liability debtors may face by accepting a settlement offer, and they are not required to make such disclosures. While accepting settlements may make sense for certain individuals, bankruptcy may be a better choice for many others. People should consider consulting with a bankruptcy attorney about which option may be better for them in their individual circumstances.
Source: CreditCards.com, "1099-C surprise: IRS tax follows canceled debt", Connie Prater, November 04, 2014