Improving Your Credit Rating

If a creditor sends you a 1099-C is the debt 'forgiven' and how will it appear on your credit report?

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2013-02-28 08:36:34

  • The debt is forgiven and sooner or later a notice will appear

    on the CR. This is not a plus for you rating though. Then there is

    the IRS involvement gains, losses, blah, blah, blah.

  • It may not be good for your credit report but it is much better

    than the overdue debt that you had.




  • The IRS form 1099 is used by various entities to report income

    that they have perceived you have earned. Example: Blah Bank issues

    you a credit card. You run up $2,000 and never pay. After some time

    Blah Bank will issue a 1099 to you. They are also reporting the

    $2000 as income you have earned, to the IRS. A 1099 can be a

    blessing because no one elsae can come after you for the $2,000,

    the bad side is that now you may have to pay income tax on the


  • The IRS requires financial institutions to report to them the

    amount of principal they charge-off for individual borrowers. It is

    only to be filed after you have stopped collection activity and

    there has been no payment activity on the account for three years.

    This is not a way for financial institutions to try and collect

    further. It is an added burden on them to track these conditions

    and find the records when they meet the criteria for filling. The

    financial institution had written the debt off years earlier.

  • The state law effect of a form 1099-C varies. Connecticut views

    it as a signed writing that releases the claim, California does

    not. Kansas views it as having discharged the claim, but the

    reasoning of the judge in that case was flawed. In any case where a

    debtor has defenses to assert against a creditor's claim, SOL

    should be the last one used because its successful use

    triggers the requirement for the creditor to issue a form

    1099-C. If a defense such as lack of documentation is successful,

    the 1099-C issue is never reached.

More information for consumers

If you're receiving one of these, it is in most cases for

one of two reasons (my answers are based on the most common form of

consumer debt, credit cards--banks may also issue 1099-c forms for

mortgages, defaulted student loans, etc.--I have no idea. My post

is about credit cards or other debt not related to education or

major purchases that require financing):

1.) You have a debt that was never paid, or partially paid, sold

to a collection agency who still couldn't collect, etc.

Whatever--point is, whoever owns the debt is writing it off as a

loss. This is not very common because unless you file for

bankruptcy, most collection agencies or banks won't simply "give

up" on you. If anything, they'll file for a judgment against you

for the debt, interest, collection costs, capitalization fees, etc.

It is very unlikely that you're receiving a 1099-C simply because

the bank said "ah, lets write this one off." With the problems

lenders are having these days, no bank is going to surrender debt

as a loss. or,

2.) You had a collection agency or bank hounding you for money.

Hopefully you were smart enough to pay them off with a lump sum

instead of making payments that merely cover the interest. Anyway,

if you were even smarter, you realized that the principal of the

original debt (say it was a $5,000 credit card) was like 33% of the

amount they were now demanding, and you cut a "deal" to close the

case. Well, say it was a $5,000 credit card, they were demanding

$13,500, and you gave them $10,000 to call it even. Well, the

difference between the "demand" and your "settlement" is considered

taxable income by the government. You have to pay income taxes on

that $3,500 that you "gained."

Please note--some exceptions do apply--please refer to IRS form

982 (Google it) because there are ways to avoid paying these taxes.

Most commonly, if you were insolvent at the time of the settlement

(not bankrupt, insolvent) meaning your current liabilities (loans,

debts, bills, etc.) outweighed your assets (income,

savings/checking accounts, other assets like house, car etc.) you

do not have to pay the tax---the theory being that the debt was

written off because you couldn't pay. Now if you are making $200k

driving a Lamborghini with a beach house and a loft in Manhattan,

this would obviously not apply. This is for the people who don't

pay off bills, or negotiate settlements for partial payment to

close the case, simply because they cant afford to pay off the

whole bill.

P.S. -- When you negotiate to settle an account, you can

negotiate for whatever additional terms you want (nobody guarantees

you will get those terms, or that those terms will be honored, but

you can try). Potentially the settlement agreement could recite

that the amount the creditor is claiming is doubtful and disputed

an as a result no 1099-C form will be issued. You could also

negotiate that the creditor will not communicate further with

credit reporting agencies about the account for any reason

whatsoever (keep in mind that "pay for delete" where they actually

take it off is much more difficult to obtain), a result that leaves

you in control of the reporting and doesn't alert other creditors

that you are "putting out" ... (and you should wait to

dispute the account until all other defaulted accounts are settled

or past the statute of limitations). Ideally, you would also

negotiate for a liquidated damages clause in case they fail to

honor their agreement so there would be no argument over what they

would have to pay you if you took them to court, but good luck

getting that one.

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