1099-C Cancellation of Debt

There is a common belief that a 1099-C means that the debt in question has been cancelled and that no further collection may be made by the creditor.  However, this is not the law.  A 1099-C filed by a creditor with the IRS, standing alone, does not mean that the debt has been cancelled.

Pursuant to the Internal Revenue Code, creditors are required to file 1099-C even though an actual discharge of indebtedness has not yet occurred or is even contemplated.  Rather, there may be an event “deemed” to constitute a discharge of the debt solely for purposes of determining the reporting requirement to the IRS.  The courts have held that a “Form 1099-C” is not an admission by the creditor that it has discharged the debt or can no longer pursue collection.

Pursuant the IRS regulations, there are 8 identifiable events which require the creditor to file a 1099-C: (1) a discharge of indebtedness in bankruptcy (2) a cancellation or extinguishment of an indebtedness in a receivership, foreclosure or similar proceeding (3) a cancellation or extinguishment of debt upon the expiration of the statute of limitation (4) a cancellation or extinguishment pursuant to an election of remedies (5) a cancellation or extinguishment of debt where debt unenforceable pursuant to probate or similar proceeding; (6) a discharge of indebtedness pursuant to agreement between the creditor and debtor for less than full consideration; (7) a discharge of indebtedness pursuant to a decision by the creditor to discontinue collection activity and  (8) the expiration of the nonpayment testing period.

So what does this mean?  This means that unless you have received something from the creditor stating that the debt is forgiven in addition to the 1099-C, they still have a right to collect on it unless one of the above exceptions applies.  Collection on debt where a 1099-C has been issued is happening to many people in California who have junior deeds of trusts against their homes.  They received a 1099-C from the lender and then years later someone who bought the debt starts foreclosing on the property.

So what should you do?  If you have received a 1099-C from a lender, especially a lender with a lien against your home, you should call the lender and see if they have actually “forgiven” the debt.  If they have, you need something in writing that says exactly that i.e. the creditor is not going to pursue any further collection on the debt.  In addition, if the lien is against your home, the lender must reconvey the deed of trust.  If the lender will not issue you a letter saying that the debt has been forgiven, you need to seek legal counsel immediately.  A 1099-C without further evidence stating the debt was forgiven is a ticking time bomb. 

1099-C issues are complicated and generally misunderstood.  If you have questions, seek counsel.  I see people for a FREE 30 minute consultation in my offices located in Walnut Creek and Brentwood. 

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING A DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY.  THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION.   © 2015

Beware of Friends and Family

Co-Signing and Joint Ownership

After being a bankruptcy attorney for over 25 years, there is one thing I know for sure---sooner or later one of your friends or family will ask you to co-sign a loan for them or ask you buy something with them. It may be a car, boat, timeshare, vacation cabin, investment property or building. All you have to do is keep breathing and this will happen to you.

Co-signing or buying anything with a friend or family will have consequences. Here is just the tip of the iceberg.

1.     Co-signing on a loan to something will affect your credit. It increases your debt to income ratios and it will reduce your ability to get other loans. Your credit will take an immediate hit.

2.     When you co-sign on a loan or purchase agreement, you are jointly and severally liable on the whole obligation i.e. if the other person doesn’t pay, you are on the hook for the whole amount. The fact that you own only a portion of the boat, trailer, house etc per your agreement with the other owners is irrelevant to the lender. If the other co-signers stop paying, you responsible for the full balance still due and owing. Your credit score will fall if there is a default. It doesn’t matter if only 1 spouse signed. California is a community property state. One spouse can bind the other.

3.     There is a HUGE difference between co-signing on a personal loan and real estate loan. If you default on a personal loan even if it is secured by a boat, trailer or car, the worst thing that is going to happen is the lender will repossess the collateral and get a judgment against you for the deficiency balance on the loan. However, if you co-sign a real estate loan, that loan will be characterized as recourse loan unless it is non-recourse debt which in California means it was a loan used to purchase a 1-4 unit property and YOU live in the property. If the loan is not a non-recourse debt and there is a default, there may be personal liability and tax liability.

4.     Never underestimate the IRS and California State Franchise Board. When a lender determines that a debt is uncollectable either because it is time barred or a deficiency is prohibited by state law or the parties agree to a settlement for less than the balance due and owing, the lender is REQUIRED to issue a Cancellation of Debtor Statement known as 1099c if the lender is forgiving $600 or more. You NEED to know your tax liability BEFORE you get the 1099c. There are ways to minimize the tax liability. 

Do not jeopardize your future. If your friends or family ask you to co-sign on a loan or buy something with them, JUST SAY NO. If you have the resources to GIVE them money, that is a better option. If you have already co-signed a loan and you think there is going to be a default on the loan, seek legal counsel immediately. This is a complicated area of the law, but a real estate or bankruptcy attorney should be able to make to an analysis of your particular situation fairly quickly which will allow you to determine your personal liability and tax liability in the event of a default.

WE ARE A DEBT RELIEF AGENCY. WE HELP PEOPLE FILE BANKRUPTCY RELIEF UNDER THE BANKRUPTCY CODE. THIS INFORMATION IS NOT PROVIDED AS LEGAL ADVICE AND SHOULD NOT BE RELIED UPON IN MAKING ANY DECISION REGARDING A VOLUNTARY DEFAULT, SHORT SALE, FORECLOSURE OR BANKRUPTCY. THIS INFORMATION IS NOT A SUBSTITUTE FOR OBTAINING TAX & LEGAL ADVICE REGARDING AN INDIVIDUAL SITUATION. GRIMESBK.AW.COM

© 2011 Joan Grimes