Settlement Offers from Creditors

[SinkingFast]

In light of the tax code discussed, also not true.

Since you clearly noted above that debt charged off BEFORE BK is tax liable, then my statement above is still true.

Debts discharged in BK are not tax liable income.

[SinkingFast]

Just to add a note:
While researching the above, there was ample evidence that creditors seldom even send a 1099-C form to the creditor or the IRS...take that for what it is worth.....

Surely you misspoke!!

You must have meant to say that creditors seldom even send a 1099-C form to the DEBTOR!!

[FoolAndHisMoney]

Yes, I found it:
When a creditor sends you form 1099-C, the IRS treats the unpaid debt as income to you, even though you didn't actually receive the money.

Exceptions:
1. The debt was discharged in bankruptcy BEFORE it was charged off by the creditor.
2. You were insolvent at the time the creditor charged off the debt.

The above is from the tax code. So, what does "insolvent" mean? More from the tax code:
In general "insolvent" means your total debts are/were more than the value of your assests (all your assests including money). If your debts are more than your assets, you are insolvent.

That is the code, it appears that most potential Chapter 7 filers will have nothing to worry about. Chapter 13 filers will have to make sure the debt wasn't charged off before the bankruptcy, which sounds incredibly likely to me. So, just because you had your debt discharged in BK, you can still be liable for taxes IF the creditor charged off the debt prior to the BK. Interesting. BTW, the form you need is IRS form 982 or even a letter outlining your insolvency.

It seems to me that most BK case could slide under by using the insolvency defense, thus avoiding taxes on the charged-off debts and not worry about if they were charged off prior to the BK or not.

By that standard the whole world is insolvent. You buy a new car for 25k a minute after you drive it off the lot it's upside down since it's drops in value, but you have to payback the face value plus interest. A home usually takes time to increase value after you buy it. Sometimes months, sometimes years, sometimes never. Most house hold items like TV sets and clothes are worthless in a very short time after it's purchase. Most people have cc debts with no savings. So we're all pretty much insolvent. Those of us here are aware of it though.

[SinkingFast]

By that standard the whole world is insolvent. You buy a new car for 25k a minute after you drive it off the lot it's upside down since it's drops in value, but you have to payback the face value plus interest. A home usually takes time to increase value after you buy it. Sometimes months, sometimes years, sometimes never. Most house hold items like TV sets and clothes are worthless in a very short time after it's purchase. Most people have cc debts with no savings. So we're all pretty much insolvent. Those of us here are aware of it though.

Painfully so! The CCCS counseling packet showed our negative net worth in a very nice little chart. And then they did it again in our Pre BK Cert packet.

Like we need reminding!!

[aa06a47]

In light of the tax code discussed, also not true.

Read it again no-it-all, you are giving the wrong interpretation. SinkingFast is accurate, debts discharged in bk are not treated as taxable income.

With that said, there are some exceptions. For people who have lost alot of money in the stock market, I'll use that since I'm there, done that, and researched that, the IRS will not allow you to continue to carry that loss over, at least an amount equal to the write off in bk. For example, you have a 100K loss in the stock market, the IRS only allows you to lose 3K so you have to carry the 97K over.... you file BK the next year with 90K in discharged debt, you now only have a (97-90) 7K carry over loss. If you file bk and have 110K in discharged debt, your carry over loss now becomes ZERO.

So, some people end up paying taxes on there bk even if they don't see it. I have a substantial carry over loss that can only be taken 3K a year. Y2k crash Since my debts is much more than my loss, the BK write off will wipe out the entire carry over loss. So, I am technically paying taxes on a big chunk of what is being wiped out in my bk, (because I already had paid taxes on the money in 1999, but that I lost in 2000)

[no_it_all]

Thanks for the input...Please read what I have posted. Most of you are confused. A "charge off" is not a discharge. One is a tax term, the other is a bankruptcy term. If your credit was charged off, all it means is the the creditor listed it as a "Loss" on their tax records. It has nothing to to with bankruptcy. You are still liable for charged off debts. Now, the credit card company "sells" your account to a collections agency. You are still on the hook for the debt. Just because it is charged off is not relevant. Otherwise, WHY GO BANKRUPT ONCE THERE IS A CHARGE OFF??? When you finally go bankrupt. The debt is "discharged" meaning you are no longer liable to pay it. GUESS WHAT??? you STILL are liable for the taxes since it was DISCHARGED after it was CHARGED OFF !! Is that clear or do I have to explain it S-L-O-W-E-R ...sheesh!!! To say that discharged debts are tax exempt is WRONG !!! It CLEARLY depends on when the "charge off" took place relative to the "discharge" . Argue with the tax code, not me!! BTW as you read the code answer this quiz in your own mind: Jack has a credit card with a ten-thousand dollar balance. After ignoring demands to pay for six months, he received a letter from the creditor indicating that the debt will be "charge off", reported as such on his credit report, and turned over to a collections agency. Jack read on a BK forum that when he finally goes BK, he will not have any tax liablity on this debt since it will be "discharged". Sure enough, eight months after receiving his nasty letter from the credit card company, his Chapter 7 case is closed, and all debts are "discharged"..Question: Does Jack have a tax liability? Why or why not?

[no_it_all]

Read it again no-it-all, you are giving the wrong interpretation. SinkingFast is accurate, debts discharged in bk are not treated as taxable income.

Wrong again. Read the code. It depends on if the discharge is after the "charge off". If it was, then there is possibility of a tax liability. Do not confuse the tax term "Charge Off" with the legal bankruptcy term "Discharge". They do not mean the same thing.

[no_it_all]

Surely you misspoke!!
You must have meant to say that creditors seldom even send a 1099-C form to the DEBTOR!!

Thank you for pointing the error out. You are of course correct.

[no_it_all]

Just a hint to the group. When reading, make sure you know the exact meaning of similar sounding words. In a court, specific words have specific meanings. In everyday conversations we are sloppy in that regard. For example, someone said something about having "discharges" before bankruptcy having one consequence and "discharges" after bankruptcy having another consequence. Well, not to be picky (but the courts are), the ONLY way to get a "discharge" is in bankruptcy court!

[aa06a47]

Most of you are confused. !! Is that clear or do I have to explain it S-L-O-W-E-R ...sheesh!!!

Well, for one, I don't really appreciate you talking down to me or anybody on this board. Can I do anything about it, no. I guess I can just put you on ignore. You are really trying to confuse people with symantics or trying to impress them. You haven't impressed me, try Harvard or some place like that where they eat smart asses like you for lunch everyday.

The facts: If you get your debts discharged in BK court, you don't have to pay taxes on that discharged debt. If you make a settlement, the "charged off" amount is taxed, and if you can show insolvency, then you might not have to claim that amount. Thats all.

[SinkingFast]

Well, for one, I don't really appreciate you talking down to me or anybody on this board. Can I do anything about it, no. I guess I can just put you on ignore. You are really trying to confuse people with symantics or trying to impress them. You haven't impressed me, try Harvard or some place like that where they eat smart asses like you for lunch everyday.

The facts: If you get your debts discharged in BK court, you don't have to pay taxes on that discharged debt. If you make a settlement, the "charged off" amount is taxed, and if you can show insolvency, then you might not have to claim that amount. Thats all.

Now, Now, Aa,...................

When I first came here, I had READ everything and thought I had it all figured out and thought these people were wrong, wrong, wrong.

Just like no_it_all. Kinda. Sorta.

I wasn't as snotty, or rude, or condescending.

But then I saw the light. TEN times. I saw the light TEN times.

TEN different Consults with TEN different attnys.

When I'd cite Code and give my "interpretation" of the wording, the attnys would agree that the Law could be applied that way. But that ain't the way the Law works in the Court here.

So, MAYBE, after no_it_all visits a few attnys, I HOPE he'll sing a bit different tune.

[aa06a47]

Now, Now, Aa,...................

When I first came here, I had READ everything and thought I had it all figured out and thought these people were wrong, wrong, wrong.

Just like no_it_all. Kinda. Sorta.

I wasn't as snotty, or rude, or condescending.

But then I saw the light. TEN times. I saw the light TEN times.

TEN different Consults with TEN different attnys.

When I'd cite Code and give my "interpretation" of the wording, the attnys would agree that the Law could be applied that way. But that ain't the way the Law works in the Court here.

So, MAYBE, after no_it_all visits a few attnys, I HOPE he'll sing a bit different tune.

I don't give a crap how many lawyers he sees, he will still be the "do I need to explain it s..l..o..w..e..r butt shitter". Guess I was raised differently.

[no_it_all]

Sorry to ruffle feathers...but if you are going to call me out..you better know whisky tango foxtrot what you are talking about..I will be taking my LSAT in June and fully expect to get into HLS.....

[no_it_all]

The facts: If you get your debts discharged in BK court, you don't have to pay taxes on that discharged debt. If you make a settlement, the "charged off" amount is taxed, and if you can show insolvency, then you might not have to claim that amount. Thats all.

Well, you got most of that correct. What you missed is this: If you get your debts discharged in BK court, you MAY have to pay tax on the discharged amount if the creditor charged it off prior to the bankruptcy. I say MAY because as you correctly pointed out in your post, it depends on if the debtor was/is solvent or not. If the debtor is insolvent, there is no tax liability. Again, note that it is not uncommon for creditors to NOT send a 1099-C to either the IRS or the debtor.....Oh, and it isn't "you may not have to claim that amount". This is a slam-dunk. If insolvent then there are no taxes on the discharged amount. End of story.

[SinkingFast]

Sorry to ruffle feathers...but if you are going to call me out..you better know whisky tango foxtrot what you are talking about..I will be taking my LSAT in June and fully expect to get into HLS.....

Well woohoo for you!!

Ya know, tho, 50% of all attnys graduate in the bottom half of their classe.

And just casue you have book learning doesn't mean you got the common sense to use it properly in life applications. Which you have made abundantly clear in your many cryptic and sarcastic remarks here.