Does Credit Card 'Charge Off' trigger 1099 ?

[HHM]

How did this thread get so complicated...

A charge off (by itself), does not mean a 1099 will be issued. That is really all that had to be said.

If you wanted to add more, then, the bank has the "option" to foregive the debt when they charge it off, but they NEVER do; the bank turns it over to collection or sells it to a junk debt buyer.

[DebtHater]

Being the OP inquired regarding a charge off a 1099 should not apply. 1099's apply for settled debts (secured or not).


Per the "Instructions for Forms 1099-A and 1099-C" from the IRS' website a 1099-C (cancellation of debt) is to be filed be a creditor for any debt canceled of $600 or more.

The one of the definitions of a "canceled debt" is:

"A discharge of indebtedness under an agreement between an agreement between the creditor and the debtor to cancel the debt at less than full consideration".

This is when a debt is settled for less than the amount owed by the original creditor.

[JustFileSuit]

[QUOTE=DebtHater;362099]

"A discharge of indebtedness under an agreement between an agreement between the creditor and the debtor to cancel the debt at less than full consideration".

All true, but that is only one circumstance. 1099's have been issued under circumstances were the creditor just does it arbitrarily (like in the phone ad situation I referenced earlier).

The thread got complicated because, unfortunately with the govt, finances just tend to be more complex than they need to be.

However, once again, it is mostly theoretical, as it is not typically done with cc debts. The debt gets sold off to a bottom-feeder, and they sit on it just in case you win the Big One on the Lottery -(like about the 145 million dollar Powerball! ).

[Pizza]

May I also add that if you can prove that you are insolvent when the write-off occurs, the imputed income can be denied and the taxes need not be paid. Filing BK or even being eligible to file makes it fairly easy to prove such insolvency.

Therefore if you are insolvent, no need to get worked up over paying additional taxes. If you CAN pay the debt, watch out because the additional "income" could push you into a higher bracket, compounding your financial problems.

[OHBOY]

'Pizza' qoted: "Filing BK or even being eligible to file makes it fairly easy to prove such insolvency.
Therefore if you are insolvent, no need to get worked up over paying additional taxes"



Please allow me to strongly disagree. Just because one is applying bk laws and is filing, or is eligible to file, does not go hand in hand with being 'insolvent'. i.e.:

While IRA assets are considered 'exempt' by bk standards (I believe up to a mil), for purpose of determining whether or not one is insolvent, they are not exempt by IRS standards.
Hence I would think, that it's never good to just sweetly & innocently believe that taxes could not possibly enter the picture.

An individual must first run the numbers to see the end result, and to determine whether or not one is indeed insolvent or solvent in the eyes of the taxman.

[GoingDown]

A 1099 is ONLY issued if the person who owns the debt accepts some payment that is less than the face value of the debt. When that is done the difference between the face value of the debt and what the lender accepted as "full satisfaction" for the debt is then reported on a 1099. As far as the IRS is concerned it is no longer imputed income but real income.

Legally, if the lender accepts an amount less than face value of the debt as full satisfaction of the debt and issues a 1099 they cannot sell the debt to a JDB because the debt has been fully satisfied. Despite that reality, sometimes they do so anyway. They do so because the person who is legally harmed by the sale is not you but the JDB. Of course, in reality you are harmed too because you have to go through the process of proving to the JDB that you have no legal obligation to pay them. JDB will buy debt that they have no legal right to collect simply because they figure that it is often cheaper for you to settle the debt than to take on the hassle.

As for you second question, The 1099 would reflect the difference between the face value of the debt and what you paid to settle it (regardless of who you paid it too).

This is not true.

A friend of mine was issued a 1099-C for an old charged off HSBC MasterCard account. He never paid any of that debt. There was no settlement at all. The original creditor kept the debt and did not sell it to a junk debt buyer. The original creditor tried to collect it themselves and by using various collection agencies and then finally fell silent. They gave up. And after years of hearing nothing from HSBC, he thought he was in the clear. He thought that the debt was going to go to its statute of limitations death quietly. And then out of the blue he got a 1099-C form in the mail from HSBC, discharging the entire amount owed on the credit card.

So he has to file Form 982.

Directly quoting from Publication 4681 of IRS "Insolvency
Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation. You were insolvent immediately before the cancellation to the extent that the total of all of your liabilities exceeded the FMV of all of your assets immediately before the cancellation. For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account). Liabilities include:

The entire amount of recourse debts, and

The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.


You can use the worksheet on page 6 to help calculate the extent that you were insolvent immediately before the cancellation. "



My question is this...

Has anyone heard of junk debt buyers issuing 1099-C forms?

[Pizza]

Please allow me to strongly disagree. Just because one is applying bk laws and is filing, or is eligible to file, does not go hand in hand with being 'insolvent'. i.e.:

While IRA assets are considered 'exempt' by bk standards (I believe up to a mil), for purpose of determining whether or not one is insolvent, they are not exempt by IRS standards.
Hence I would think, that it's never good to just sweetly & innocently believe that taxes could not possibly enter the picture.

An individual must first run the numbers to see the end result, and to determine whether or not one is indeed insolvent or solvent in the eyes of the taxman.

Sorry for taking so long to reply to this.

To clarify: The way I see it, until you either file BK or repay your debt, you should be checking your assets to debts and determining the amount of your insolvency. By doing so, it both saves you time if you file BK (because you have your numbers) and makes it easier to prove insolvency if a 1099-C beats you to the filing.

This is a tricky and troublesome act because you can't predict if your future circumstances are changing or not. But if you believe you are CURRENTLY insolvent, that's why you're here, so prove it to yourself by running the numbers... so then you don't have to sweat it unless you see your financial situation changing soon.

Re: Why has this thread become complicated?

Because, naturally, if a company 'can' send you 1099-C forms for tens of thousands of dollars or more in debt, it gets on people's nerves, EVEN if it is likely that no one will send the form. It's a legitimate concern because a fully dischargeable unsecured credit card debt can become a non-dischargeable tax liability. Anxiety and fear are powerful forces.

[catleg]

I think JDB's got an exemption from the IRS regs which REQUIRE a "financial institution" to issue a 1099 for debt forgiveness after 3 years without any activity on the account.

I think the rationale used was along the lines that, the 1099-c is only supposed to reflect the original principal that was borrowed, along with any interest listed separately, and no other fees or penalties, and JDB's simply do not have this level of detail on their "assets". (accounts)

[Pizza]

I think JDB's got an exemption from the IRS regs which REQUIRE a "financial institution" to issue a 1099 for debt forgiveness after 3 years without any activity on the account.

I think the rationale used was along the lines that, the 1099-c is only supposed to reflect the original principal that was borrowed, along with any interest listed separately, and no other fees or penalties, and JDB's simply do not have this level of detail on their "assets". (accounts)

So is the sale to a JDB considered an accounting write-off, in which you should receive a 1099-C in the amount of the short sale (deficiency after the sale), and that's the end of it? And are the institutions actually "REQUIRED" to issue 1099's or do they issue them in their own interests (which the consensus seems to indicate rarely happens either way)?

....the bank has the "option" to forgive the debt when they charge it off, but they NEVER do; the bank turns it over to collection or sells it to a junk debt buyer.

^
The language of the above quote seems to indicate that in order to receive a 1099-C, the creditor would have to give you the 'gift' of forgiveness, something which we would not expect for any institution to 'bless' us with.

[GoingDown]

Sometimes it is a passive activity on the part of the original creditor who for whatever reason did not sell the debt to a junk debt buyer.

They tried to collect at first, sending the account to various collection agencies (not junk debt buyers) and after getting no results, and many Cease and Desist Letters, they fell silent. and just held on to the debt. Perhaps a mistake on their part.

Then after 36 months of no collection activity, as required by law, the creditor issued a 1099-C.

Was it forgiven?

[Dst1]

I think people are getting confused about is a difference between the legal principles involved and the accounting principles involved. A 1099 is first and foremost an accounting mechanism. It is, to be sure, an act of accounting from which legal consequences flow.

There is never a situation where a creditor is *required* to issue a 1099. A creditor can, if it so chooses, simply eat the loss. Never issue a 1099 and never sell the debt.

The reason creditors almost never file a 1099 and sell off the debt instead is the legal consequences that flow from such an act. Why? Because the creditor has a fiduciary duty to their shareholders. Issuing 1099 to all and sundry is in effect giving away free money. Same reason they sell the debt; it maximizes profitability (minimizes loss).

Of course, almost never and never are not the same words. People have pointed out cases where a 1099 might be issued. If the debt was issued shortly before a BK filing there may never have been an opportunity to sell the debt. Paper work may have fallen between the cracks and buy the time it was rediscovered it had no collection value. And so on. Yet HHM is correct. In the ordinary course of business a 1099 is not going to be issued for charged off debt.

[HHM]

There is never a situation where a creditor is *required* to issue a 1099.

Point of order, point of order, your majesty

That statement is not true. IRS regulations (read the publication that discusses 1099's) do "require" the issuance of a 1099 upon the occurrence of certain events. Granted, there is no meaningful way to enforce this in most circumstances, but by law, there is a requirement.

[nmb]

follow up

A 1099 is ONLY issued if the person who owns the debt accepts some payment that is less than the face value of the debt. When that is done the difference between the face value of the debt and what the lender accepted as "full satisfaction" for the debt is then reported on a 1099. As far as the IRS is concerned it is no longer imputed income but real income.

Legally, if the lender accepts an amount less than face value of the debt as full satisfaction of the debt and issues a 1099 they cannot sell the debt to a JDB because the debt has been fully satisfied. Despite that reality, sometimes they do so anyway. They do so because the person who is legally harmed by the sale is not you but the JDB. Of course, in reality you are harmed too because you have to go through the process of proving to the JDB that you have no legal obligation to pay them. JDB will buy debt that they have no legal right to collect simply because they figure that it is often cheaper for you to settle the debt than to take on the hassle.

As for you second question, The 1099 would reflect the difference between the face value of the debt and what you paid to settle it (regardless of who you paid it too).

This may not be the place for my question but maybe you all can help.
I have friend that did have Chase issue a 1099 for a 7K credit card balance. She paid the taxes on it but here is the kicker, Chase continues to report that account on her credit report with a balance owed and a balance past due. Am I right in thinking that legally, once Chase decided to issue a 1099 they gave up the right to collect on the original debt therefore they account should be reported as a zero balance?

Thanks for any insight.