Form 1099-C; When Forgiving is NOT Divine, part two

1099-C, when forgiving is NOT divine…

Part Two

Read Part one here.

If a Creditor forgives some of the debt you owe it, the IRS considers that amount as additional income for you that year. The Creditor can send you a 1099-C for the amount they wrote off and that is added to your total income. It may be enough to jump you into the next tax bracket – especially if it is a mortgage loan of tens of thousands of dollars.

During the few times clients ask me about debt consolidation, I advise them about the possibility of a 1099-C being sent to the IRS. I also tell them to seek the advice of an accountant or a tax attorney as to any forgiven debt and its tax consequences.  This, plus the fact that SOME debt consolidation companies are scams, are enough to convince them not to abandon the idea.  There ARE plenty of good debt consolidation companies out there, and I recommend a few – particularly Clearpoint – but otherwise caveat emptor (Google it)!

In over 5000 bankruptcies filed, I have had perhaps one percent of my Debtors receive a 1099-C on the forgiven debt. But since they filed for bankruptcy and received a discharge, there IS something they can do about it.

If you filed bankruptcy and received a discharge, and you later receive a 1099-C on the debt from the Creditors, you do not have to worry about it. You still have to DO something about it, but you do not need to WORRY about it.

Simply, a debt discharged in bankruptcy is not forgiven, instead the creditor is required to stop collecting the debt! The debt is still owed, but it is uncollectible, so the creditor might as well write it off on their own taxes and submit it to their insurance.

But they send out a 1099-C to you anyway. Why? Good question, do they get any monetary benefit from it? No, unless it helps keep their bankruptcy insurance premiums down, I suppose. They report it to the IRS and now you have to spend extra time and forms.

How can they send the IRS a 1099-C form on a debt that has not, technically, been forgiven? Another good question. I am not a tax attorney and the tax code is second only to the Harry Potter series in page count. Perhaps somewhere in that former rainforest of volumes, the tax code says that debt discharged in bankruptcy still counts as forgiven debt (although it is excepted). Perhaps it says the opposite; perhaps it does not address it at all (most likely).

Perhaps it may mention what happens when a company sends the IRS an intentionally false 1099-C.  An Attorney General (state or federal) looking to make some bonafides with a non-big-business constituency can look into this if they are looking for some political clout should they ever run for office.

I am sure some attorney, SOMEWHERE, has looked into this…

Regardless, the credit company sent you a 1099-C on a debt you discharged in bankruptcy. You HAVE to claim it on your taxes – the IRS has a copy of the 1099-C as well and will be looking for that income on your returns! What do you do?

When you file your taxes, you should also file a Form 982, labelled Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

982

Fill in your name and social security number, check box 1a and fill in Line 2 with the amount on the 1099-C. Then complete the rest of Form 982 and file it with your taxes.

Don’t do this by yourself! I cannot stress this enough! It’s okay to get the forms free online, but take them to an accountant or a good tax preparer. I have nothing against the people who work in the kiosks in discount department stores or the people who volunteer their time at churches and care facilities who help with taxes. If not for the 1099-C I have no problem recommending you go to them to help you with your taxes. But this is worth paying a little extra. Remember – the IRS is waiting for you to account for the amount on that 1099-C.

Same for credit companies. Some loan companies will help you file your taxes. That’s fine … but they may be the same companies that will send you their own 1099-C in the future.

If you discharged the debt in bankruptcy, a 1099-C is nothing to worry about, although it may cost you extra time and costs when you file your taxes (you can deduct the cost of the tax preparer on next year’s taxes if that is any consolation). A 1099-C is the final thrash at you from a discharged creditor.

Mean? Yes. Petty? Yes. Are you stuck with it? Yes. Can you do something about it? Yes – if it was discharged in bankruptcy.

 

Original Material Copyright 2016 Michael Curry

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Form 1099-C, When Forgiving is NOT Divine … part one

1099-C, when forgiving is NOT divine…

Part One

Bankruptcy clients rarely receive a 1099-C. Only on certain specific debts do I advise a client that after discharging their debt they might get a 1099-C in the mail. Usually mortgages, specifically mortgages with Greentree.

Also, they come in waves every few years. Earlier this year (2016) I had four or five calls from clients about getting a 1099-C. This is the first time I have had to handle calls about it in about five years. I suspect that the person in charge of doling them out at a credit company has moved on and a new person takes over the department trying to make his (or her) bones by inflicting these flimsy pieces of paper on their heretofore loyal customers.

What is a 1099-C form? When a creditor forgives a debt that you owe, it can send a 1099-C to the IRS and that counts as part of your income you must report and on which you must pay taxes.

1099c

What?!

Let’s suppose you owe a credit card $11,000.00. Miraculously you have managed to persuade the company to accept $6,000.00 in one lump payment and they write off the rest. They agree and do not renege.  You pay (somehow managing to collect the money – hopefully not as a loan from another credit card company thereby going from the frying pan into another frying pan) and they still do not renege.

(Keep in mind this is a fantasy only used as an example. The odds of a credit card company actually agreeing to something like this and not weaseling out of it even after payment are the same as winning the lottery – so you might as well win the lottery and pay off the card entirely…).

Everyone is now happy. Until you get a letter from the credit card company some months later containing a 1099-C. Now you have to declare that $5,000.00 that was forgiven as income.

Note that you have to declare that $5,000.00 as income whether you get a 1099-C or not!

The logic, that word used loosely, is as follows: now you do not have to pay that $5,000.00. You have five grand you would not have had if the credit card company had not forgiven the debt. That $5,000.00 is income for the year in which it was forgiven.

“But it would have taken me more than five years to pay off that $5,000.00, why does it count for only that one year?” Don’t try to argue around this with reason and sensibleness …

Imagine this family earns $35,000.00 per year. For 2016, their income will be $40,000.00.  If this person is single they are in a new tax bracket – 25% instead of 15%.

The problems come in with real estate mortgages – either modifications or short sales or whatever the latest scheme is from the mortgage companies. In cases like this we are not talking about a “few” thousand, but tens of thousands. Suppose the bank writes off $60,000.00 from the house you just gave back to them. They send you a 1099-C.

Now you go from $35,000.00 to $95,000.00. That a jump up one tax bracket for a married couple, two brackets for a single person!

Here’s an ugly scenario: imagine if the student loan problem is resolved and the government starts forgiving loans. What if THEY start sending out 1099-Cs? You might go from owing the Department of Education $200,000.00 to owing the IRS $100,000.00! And the IRS doesn’t believe in forbearance or deferment! {Note that if a student loan was forgiven because the person who received the loan worked in an underprivileged area as a teacher or a physician (remember that was the original premise for the TV show “Northern Exposure”), that is an exception to this rule.}

Does the credit card or mortgage company benefit from this? No. They do it because 1) they are required to under the tax code, and (more likely) 2) it tickles them.

What can you do? Not much, I’m afraid. You will have to consult an accountant or a tax attorney. You can except the “income” from a 1099-C only in certain circumstances – proving insolvency, if the debt was your home, your business or farm property … things that go beyond this blog and my expertise.

Speak to an accountant or a tax attorney for ways to stave off the extra income.  Tax avoidance versus tax evasion.

Can you file bankruptcy on the debt? No, as there is no debt to discharge. I have had to break this bad news to a few clients in my twenty years of practicing bankruptcy, but not many. And remember – even if the creditor did NOT send you (and the IRS) a 1099-C, it is still your duty to report it as income!

But what if it WAS for a debt that was discharged in bankruptcy?

Ah, that is another story altogether! And a story with a happy ending!

 

Original Material Copyright 2016 Michael Curry

 

 

Budgeting, avoiding debt and getting out of debt, Part 2

budget

Budgeting, avoiding debt and getting out of debt

Part 2

            On January 27, 2015 I was asked to speak to families by the BCMW Head Start program in Centralia about budgeting, avoiding debt and getting out of debt.

            I prepared a thirty-minute speech with handouts and other documents. Most of my speech was cobbled together from notes online, and I thought I would write it up as a blog to share with you.

            Note that these are lecture notes and not originally done to be read. It’s like reading a play – something I always complained about in school when studying Shakespeare, etc. It’s like trying to “listen” to Mozart or the Beatles by only looking at the sheet music. So it is a little disjointed, but I hope you enjoy it.

            Check the first part of my speech here.

***

            Now that you’ve found a small pool of “extra” savings, how can you use that to get out of debt?

            Make a conscious decision to stop borrowing money. Right now. If you want to get out of debt fast, you have to stop using debt to fund your everyday expenses and lifestyle. This means no more financing furniture, no more signing up for credit cards, no more test driving brand new cars that you don’t have the cash to pay for. This will help you focus solely on the debt that you currently do have so that you can develop a game plan to pay it off quickly.

            DON’T take out a big loan to pay off all the smaller ones; you can’t borrow your way out of debt. Especially if you are still used to using debt to finance your everyday expenses. In a few years, or even months, you’ll be back to several loans and credit cards AND the big loan that paid off your previous debt…

            Ask for a lower interest rate: Frankly I usually have doubts about this working, but I’ve had people tell me they have had some success. Grab a bill from any account charging you more than 15% interest. Dial the toll-free number on the bill and ask to have your rate reduced — say, to 10%. Tell them that you’d really like to stay with them as a customer, but you are facing financial difficulty and have received offers for much-lower-rate cards. Stand firm and remember that, to them, you are both a customer and a means of profit. You have nothing to lose – all they can say is “No.” Thank them and hang up. But if they say yes, you could save some money. And always, always ask a letter from them confirming the new rate.

            Should you switch to a low-interest or no-interest credit card? Well, why not? If you stick to the payment plan it will save you money in the long run. One saying is applying for lots of credit cards at one time hurts your credit. Odds are your credit is already hurting right now … so where’s the real harm? And all the new credit cards can say is no and you can cancel them before charging anything on them – but watch out for the transfer fees. Is it worth paying no interest when they add a thousand dollars to your bill?

            Is there any way to earn extra cash? Books and financial gurus tell us to “go get a second job”. Yeah, right. I earn more money, I lose my aid.  Or “start your own business”. Seriously? How can they say that and keep a straight face?

            But maybe the older children can help with part-time jobs. And they can help with expenses. They can start learning about income and not using debt to fund living expenses. A habit they’ll get into that will benefit them the rest of their lives!

            Can you sell things? Don’t think of ways to make some extra money as a waste of time. You might spend all day on Saturday sitting at your yard sale for $40.00. But it’s $40.00! What else would you be doing? Watching TV? The kids can help count money and make change – my gosh they might learn something!

            Take old toys to consignment shops, sell old clothes on those online or Facebook yard sales.

            Once you have found some extra cash, it’s time to organize your debt and start paying it off.

***

            Financial gurus use two approaches:

  1. List your debts smallest to largest regardless of the interest rate. This helps build momentum. When we paid off our first debt it’s encouraging and exciting! Even though we had higher interest debts, this gave us something that was very powerful: the belief that we could get out of debt quickly if we stuck to the plan. Then when that debt is paid off, roll that monthly payment into the next debt.

            Example: you’ve found a pool of $75.00 extra per month and pay that on a bill until that is paid down. Then you go to the next bill and pay that bill the extra $75.00 plus its minimum payment, let’s say $30.00, too. So you have $105.00 going to pay that bill. Once that is paid off in a few months to a year roll that $105.00 to the next bill and add its minimum payment – let’s say $40.00 per month. So you are making $145.00 per month on that third bill!

  1. List your debts starting with the highest interest rate first and end with the debt with the lowest interest rate. This will save the most money in interest over time.

            Regardless of which process you choose, the key is to stick with it.

            Throw that excess cash at your debt

            I mentioned this before … if extra money comes to you, take this cash and use it to tackle your debt. Some good examples would be a tax refund, selling a car, selling toys at consignment shops or online. The more cash you can put towards your debt, the faster it will disappear.

            Be aggressive in paying down debt, but don’t get so ambitious that you risk missing minimum payments on your mortgage, automobile, or any other secured credit account. (Secured means that if you miss enough payments, the bank can show up and take away your stuff.)

***

            Then there is bankruptcy, this is what I do. I am a bankruptcy attorney. In this debt pay-off plan I consider this the nuclear option. Boom!  I’ll explain why in a bit.

            There are two kinds of bankruptcy you can file – the Chapter 7 and the Chapter 13. Why they are called that is because the bankruptcy code is like any book – it’s divided into chapters and the chapters that apply to people at 7 and 13. Chapter 13 is a consolidation of all your debt – kind of like what we are talking about right now. The Chapter 7 eliminates or liquidates all debt.

            There’s a lot more to it than that, such as car loans and house loans, but that would take up another half hour.

            The trouble with filing bankruptcy is the same as getting a big loan to pay off your debt. You need to get in the habit of not financing your everyday expenses with credit. Bankruptcy will eliminate your credit cards and loans, but if you don’t learn to live and spend without them – you’ll be back to owing more credit cards and loans in a few years, or months!

            Remember that originally credit cards were a safe substitute for cash – usually in bigger cities or stores. I charge on my account and pay it off at the end of the week. In rural areas people charged until they had the cash available. It’s too wet to cultivate the beans, but after ten days of sunshine I can harvest the crop and pay store or bank debt.

            Debit cards are now the substitute for cash. I use a debit card instead of cash. It’s safer and most places take them now. Don’t use credit cards for food or clothes. When Wal-Mart announced in the mid-1990s they would start accepting credit cards, I knew the impact it would have on people dependent on credit cards.

***

            OK, so I’ve paid off all my debt, now what? Establish a starter Emergency Fund of $1000.

            You might be wondering, ‘Why is having an emergency fund important’? Well, if you don’t have any money in the bank and an emergency does happen, how are you going to pay for it? For most people, credit cards become the funding source for those emergencies. If you are trying to get out of debt then you need to put a buffer between you and debt; that is exactly what an emergency fund does.

            A fun way to save money is to add money into a jar or piggy bank at the rate of the same amount of dollars as the week of the year beginning January 1st (we’re nearly in February so you will have to catch up quick). $1.00 the first week, $2.00 the second week, etc. This might get tight by the time you get to week 30 or so… (this will be mid-July), but by then you’ve collected $465.00 – in ten weeks that will be $820.00 (mid September): there’s your Christmas spending money. If you can make it to Week 48 (just after Thanksgiving), that’s $1,176.00. That’s a nice way to save up for your emergency fund. By the way, if you want to catch up, the end of January totals $15.00.

***

            When you have a huge debt load you feel isolated and bummed out. But if there is one thing to remember is that you are not alone. And there are people you can turn to for help. There are lots of books and financial gurus out there. You can check out books and DVDs from the library or buy them cheaply on ebay.

            And by the way, check your local libraries or museums or conservatories for free activities for kids and families – game days, reading nights, movie nights, etc. Substitute that instead of paying for the family to see a movie.

            When it comes to getting out of debt one of my favorites is John Cummuta. His earlier tapes and DVDs talk about this system of paying off your debt slowly and I like what he says and his down-to-earth style. Nowadays he also talks about what to do with all that extra money: invest in this, invest in that, start your own business, etc.; but his method to climb out of debt is still good advise.

            But there are also so many scam artists and charlatans out there, so be careful. You know, “I can help you make a millions dollars. Just send one dollar to “How to Make a Millions Dollars”…” and their secret is to get one million people to send them a dollar…

            And don’t put up with smarmy condescending jerks. The type that says it’s not your fault and then spend twenty minutes telling you why it’s your fault.

            Debt doesn’t have to be forever. Develop your financial game plan and start your journey toward being debt-free.

***

            (The suggestions and ideas of this blog are cobbled together from various internet sites and blogs. Some ideas and suggestions are original; some taken from various “un-cited” sources. Copyrights, if any, are held by the proper holders.) 

Michael Curry

Budgeting, avoiding debt and getting out of debt, Part 1

budget

Budgeting, avoiding debt and getting out of debt

Part 1

            On January 27, 2015 I was asked to speak to families by the BCMW Head Start program in Centralia about budgeting, avoiding debt and getting out of debt.

            I prepared a thirty-minute speech with handouts and other documents. Most of my speech was cobbled together from notes online, and I thought I would write it up as a blog to share with you.

            Note that these are lecture notes and not originally done to be read. It’s like reading a play – something I always complained about in school when studying Shakespeare, etc. It’s like trying to “listen” to Mozart or the Beatles by only looking at the sheet music. So it is a little disjointed, but I hope you enjoy it.

***

            If you do not have debt, congratulations. There aren’t many people out there that can say that. Most of us have debt and that can cause stress & anxiety.

            If you’re afraid to open letters, answer the phone or open the door, but they are ignoring the problem – but it won’t go away.

            Being in debt can be a stressful experience. No matter what your circumstance is, if you signed for a loan, you are obligated to pay it back even if you have a life altering experience like losing a job, getting into an accident, or even if you have increased expenses due to having a child.

            Money is the No. 1 cause of relationship breakdown.

            Ignoring it may also make you dread what tomorrow might bring. And it’s all because of money worries.

            Facing up to the problem can be a frightening thought, but it is the first step towards doing something about it.

***

            To avoid debt or to get out of the debt trap you are in is to know your income and expenses.  What you have coming in and going out…

            Few of us were taught the basics of money management.  Drawing up a budget is a mystery to many. Yet it has an impact on our day-to-day living.

            Look at your income; I made an income sheet that details your gross, your deductions and then you final net income – your take-home pay.

 Gross Income                                             $

Overtime (average):                                $

Total:                                                             $_____________

 DEDUCTIONS:

Taxes

            Federal                                              $

            State                                                   $

            Social Security                               $

            Medicare                                           $

            Other (FICA, etc.)                         $

 Insurance

            Health                                                $

            Life                                                      $

            Vision                                                 $

            Dental                                                $

            Disability                                          $

            Other                                                  $

 RETIREMENT                                            $

 UNIFORMS/SHOES/EQUIPMENT    $

 OTHER                                                          $

  

NET INCOME:                                             $

 Determine your monthly income:

            Paid weekly*?                                                         x 4 =

            Paid every other week*?                                     x 2 =

            Paid two times per month?                               x 2 =

            Paid monthly?                                                        x 1 =

 

*(actually, weekly is 4.33 and bi-weekly is 2.167, but this will give you a cushion)

***

            Know what your deductions are. Is this insurance? Is this a voluntary charity? It’s important to know where your paycheck is going.

            Is there a way you can adjust this?

            Can you adjust your withholding? Do you need that big tax refund or can you lower your withholdings to make more money during the year. You may get thousands of dollars in February but are eating Ramen noodles by November, and borrowing for Christmas and paying for it with those thousands of dollars in February – it’s a vicious circle of debt…

            You can even spread out your earned income credit through the year. This can be hundreds of extra dollars per month.

***

Then look to see where what you are spending. I’ve also included an expense sheet we use at our office. You can find lots of these online or in self-help books at the library you can copy for your own use.

EXPENSE
AVERAGE MONTHLY COST
RENT OR HOME MORTGAGE $
UTILITIES  
Electricity $
Heating Fuel; Gas or Propane $
Water and Sewer $

Telephone

$
Cell Phones $
Cable $
Satellite $
Trash $
HOME MAINTENANCE (repairs, lawn mowing, painting, etc.) $
FOOD $
NON-FOOD GROCERY ITEMS (laundry soap, diapers, toiletries, etc.) $
CLOTHING/SHOES (yearly average ¸ by 12) $

LAUNDRY / DRY CLEANING

$
MEDICAL AND DENTAL EXPENSE (do NOT include insurance premiums) $
TRANSPORTATION – include gas, oil, repairs ( do NOT include car payment or insurance) $
INSURANCE (do NOT include any payroll deductions)  

Homeowner’s /Renter’s (if not escrowed)

$
Life $

Health (Major medical, dental, vision, etc.)

$
Auto $
Other $
TAXES – do NOT include any payroll deductions or any that are included with your mortgage payment  $
INSTALLMENT PAYMENTS – only those you  intend to keep  
Automobile payment $
Automobile payment $
Other $
Other
$
ALIMONY, MAINTENANCE AND SUPPORT PAID TO OTHERS (do NOT list if this is a payroll deduction)  $
CHILD SUPPORT (do NOT list if this is a payroll deduction) $

MISCELLANEOUS

 

Tobacco

$
Postage $
Haircuts/Beauty Shop $
Pets $
School Supplies/Lunches/Expenses $
Charitable contributions $
Other __________________________ $

             Be realistic! This will help you see where your spending goes.

            Check the income minus the expenses – where are you at? Do you need to trim some expenses?

            Go over each line item on your budget and ask yourself, ‘how can I make this number smaller?’ It may involve cancelling services that you rarely use like a gym or swimming pool membership, Netflix subscription (although that is sometimes cheaper than cable), etc. It might even involve reducing the amount of times that you eat out at restaurants each month.  Maybe make it once per month – makes it more special.

            Stop buying non-essentials. Buying lunch every day? Coffee? Think how much you spend on high-end coffee per cup. $7.00 for a mocha froth? One of those a day for month equals an average car payment. A car payment … a cup of coffee. Get it?

            Use coupons or buy generic (although it is usually cheaper just to buy generic green beans rather than name brand even with coupons).

            If you decide you’d like to keep getting that big tax refund instead of spreading it out through the year: think hard about what you want to use it for. Don’t blow it on a vacation.  Remember the cute phrase some years ago – “Staycation?” Go to Springfield if you like history, camp out at Giant City or Rend Lake, St. Louis Zoo is still free, etc.

            Movies? Get them from the library. Games? Rent them, too. Cable? Can you watch shows you like online or though Hulu or Netflix (but watch out your not paying extra for the internet streaming. Netflix may be $7.00 per month, but if you go over your internet limit that will cost tons… see? You have to watch for those little things)? Cell phone? Get prepaid – you can reward yourself with a smartphone after a debt is paid off.

            And feel free to reward yourself when you hit a milestone and pay off a debt. Go to that movie, eat out someplace nice.

            Before buying an expensive item, count how many hours you will have to work to pay for it or how many months’ income it is. Rule of thumb: if you can’t afford it, you can’t have it.

            Other ways to shave off a few bucks from your expenses are old tropes or old ideas, but they happen to be true and happen to work: Your car’s most economic speed is likely to be between 50 and 55 mph.   When you buy a car, get one that is two years old – its price will have dropped by 40-50 per cent – and keep it three years.

            Never go shopping when you are hungry – and, if possible, don’t take the children. My secretary told me her cousin plans their meals for the week and writes it down in a notebook and takes it shopping – cuts down on the impulse buying and buying things you don’t need or impulse items.

            The amount that you slash depends upon your commitment level to getting out of debt.  The more committed you are, the easier it will be for you to give up some of the unnecessary amenities in life.  You might not even need to sacrifice much if you can find these items or services for less.

            But you will probably have to make changes in your life to climb out the hole. Think about how long did it take you to get here? This won’t happen overnight, or in a month or a year! It takes perseverance, patience, and dedication; it takes time and effort.

            From here you can now make a plan – by looking at the kind of debt you have – secured (fixed payment) and unsecured.

***

            End Part 1 …

            Fear not, Part 2 of this speech will be posted on my blog right away … if there’s no hyperlink at the end of this blog, you can click here.

            (The suggestions and ideas of this blog are cobbled together from various internet sites and blogs. Some ideas and suggestions are original; some taken from various “un-cited” sources. Copyrights, if any, are held by the proper holders.) 

Michael Curry