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DEBT FORGIVENESS, is it all GOOD NEWS?
or is there a TAX TIMEBOMB ticking away when you meet with your CPA?
When you get your debts forgiven, you also must be notified that you will expect to get a 1099C. These little jewels are required to arrive prior to Jan 31 the following year.
Hello My Dear DEAL MAKER,
You should be celebrating because you were probably a great negotiator… especially if you picked the price and it was 40% or less of your debt due and you had to go up the ladder to get it approved… Then you have done about as well as you can to get out of your personal debt hole.
But wait my dear Deal-Maker…
Because you may have to pay taxes on that forgiven amount… even though you were probably not able to pay the bills on time and that’s what got you into this mess… even though you may not have the cash on hand… even though you may not have much other taxable income this year… so plan ahead carefully when you negotiate a credit card settlement & consider grouping pay downs together.
Let's be sure you know exactly what the 1099-C will say, and EXACTLY what date that debt was forgiven & have proof of a financial snapshot of your assets and liabilities on the dates those “deals” take place. THIS IS CRITICAL to avoid IRS headaches in the future!
I spoke to the IRS about 1099C’s and here is a summary of the line of questioning you will go through. (download this free 1099-C Debt Forgiveness 101 information document for all the details)
Resources for your personal debt forgiveness journey:
IRS Article on Debt Forgiveness
IRS Publication 4681 (same for 2010 & 2011)
IRS form 982
If these links are changed by the IRS visit www.irs.gov and input these # in the search box to find out more information 4861 & 982.
Read my free download for a BIG HEADS UP!
... and one other thing, if you are a homeowner facing Foreclosure ask your lender if they have explored HAMP gov't help too! It could buy you time and save you $$$. (& seek legal advice)
Congrats Deal Maker you are on a Debt Free mission and we are here to help you in the aftermath if needed!
FAQ: How much of my debt will they forgive?
It depends on your situation. I've heard this advice but 'don't quote me' ask your attorney! Calcuate 30% and have a great reason why that is ALL you can pay and why it has to be soon, and you may just get a deal that great... eventually... 40-50% isn't unreasonable either.