I went to court concerning a past credit last year. The plaintiff's lawyer and I agreed to a settlement that was read into record (March 2011). The settlement was lower than what the Plaintiffs wanted. I got a notice of Dismissal (RULE 3-506(B). I paid everything on time and the balance was paid in 5 months. after that, I received a paid in full letter from the Plaintiff's (SEPT 2011) and a Notice from the court that the case was dismissed (OCT 2011). Fast forward to today (March 26, 2012) and I received a 1099-C from the Plaintiff about a cancellation of Debt for another $1000.00.
Can they do this?
I paid the debt in full according to the settlement that was read into record that was agreed to by the plaintiff's lawyer and myself.
What options do I have?
If the creditor agreed to accept less than 100% of the amount you legally owed, the creditor "forgave the debt" which explains the 1099-C.
Forgiveness of debt is a taxable event, and your agreement with the creditor did not say that the cancellation of debt would not involve the usual tax consequences to this transaction.
For more information about forgiveness of debt, I would suggest visiting the IRS website at www.irs.gov. The IRS has some very easy to understand reports on this topic.
Hope this perspective helps!
You should consider 2 challenges.
The first is the amount of offset. If you owed $100k, but the creditor was negligent and did things to damage you (broke your arm, ran over your dog) and its worth $10k, it makes sense that a $90k payment is 100% of the debt. He should not 1099C you for $10k, he should write down his own internal amount owing on account of his damage to you.
So, given that you settled, WHY did they compromise a debt from someone so willing and able to pay? I will leave the answer to that question to you, just to get you thinking.
Second is net worth. If your personal liabilities exceed your personal assets then you are "insolvent". Insolvency causes no Cancellation of Debt Income.
Keep in mind that preparers are forced to file electronically and that the provision of an explanation will probably require you to file paper (form 8275) if you need to explain.
Please remember to designate your question's BEST ANSWER.
Curt Harrington Patent & Tax Law Attorney Certified Tax Specialist by the California Board of Legal Specialization PATENTAX.COM This communication is general information and not legal advice, and does not create an attorney-client relationship. This communication should not be relied upon as any type of legal advice. Please note that no attorney-client relationship exists between the sender and the recipient of this message in the absence of either (1) a signed fee contract and (2) remission of an agreed-upon retainer. Absent such an agreement and retainer, I am not engaged by you as an attorney, nor is any other member of my law firm.
The IRS rules govern when the 1099c gets sent. If there was a true controversy over the amount of the debt (versus an agreement to settle for less than what was owed) and it settled, then the 1099 should not have been issued. Sounds like the lender just agreed to accept less than was owed, so it was required to send the 1099.
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