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

Debt Settlement vs. Bankruptcy

Clients come into my office every week saying that they are in a debt settlement plan, BUT are now being sued by a creditor or they have received a 1099c income statement from a creditor that was included in the debt settlement plan.  How can this be?

First, just because you are in a debt settlement plan, it does not mean that a creditor cannot sue you on account.  It happens every day.  In some cases, the lawsuit is because a debt could not be included in the settlement because a creditor would not agree.  In other cases, the reason for the lawsuit was that the creditor was not receiving payments from the debt settlement plan in an amount that would satisfy the creditor.   

Second, just because you are in a debt settlement plan, it does not mean that the creditor will not issue you a 1099c for that portion of the debt which is forgiven.  In fact,  the IRS REQUIRES creditors to issue a 1099c to individuals where more than $600 in debt is forgiven.  Therefore, if you settle with a VISA for $5,000 on a $50,000 bill, you will receive a $45,000 1099c which will be considered income to you and will be taxed at your current tax rate.

Third, just because you are in a debt settlement/consolidation plan, it does not mean that your credit will not affected or that creditors will stop calling you.  Creditors can still contact you for the collection of debts they are owed unless or until you file bankruptcy. Also, a debt settlement program will impact your credit in the future and have long-term side effects because you will have late payments and even when you settle, your credit report will not show that the account was paid in full.

Debt settlement plans are alternatives to bankruptcy.  If you do not qualify for bankruptcy, then you will have no choice but to proceed with the settlement or consolidation plan. However, most people DO qualify for bankruptcy and in fact, most qualify for a Chapter 7 which requires NO payments back to creditors.  Even, if you do not qualify for a Chapter 7, the payments in Chapter 13 will in almost every instance be significantly lower than what you are paying to the debt settlement or consolidation company.  Better yet, there will be no 1099c received after the bankruptcy because Bankruptcy is one of the exceptions to the debt forgiveness rule.

In conclusion, these are very tough times.  You are not alone.  If you are having trouble paying your bills as they come due, I recommend you seek legal counsel before you enter into a debt settlement or consolidation plan.  Know all of your options and then you will be able to make the best decision for you and your family.  I see people for a FREE 30 minute consultation at my offices locate in Walnut Creek, Antioch and Brentwood.

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.   GRIMESBKLAW.COM(925) 323-7772     © 2011 Joan Grimes