If I Settle My Credit Card Debt Can I Avoid Paying Tax On It?

Question:

Dear Steve,

The card is offering a settlement of debt, which would write off the balance, and I would pay a portion as well. The written-off amount is greater than $600. Therefore, I would receive a 1099c form. I am not filing for Title 11. However, my liabilities are greater than my assets.

Since I am not filing for bankruptcy yet my liabilities are greater than my assets, can I file a form 982? How can I avoid paying taxes on that written-off amount as I do not have it?

Thank you so very much for your wonderful website! It has been so helpful!

Tracy

Answer:

Dear Tracy,

Well, thank you for the compliment and your message on Christmas day.

IRS Form 982 can be a bit misleading from its name, Reduction of Tax Attributes Due to Discharge of Indebtedness.

It is not referring to a discharge in the traditional bankruptcy sense. It is describing the event when a debt you owe is eliminated.

The good news is since this is about a forgiven or discharged debt, the form is easier to complete. As the IRS says, “Certain individuals may need to complete only a few lines on Form 982. For example, if you are completing this form because of a discharge of indebtedness on a personal loan (such as a car loan or credit card debt) or a loan for the purchase of your principal residence, follow the chart, [below], to see which lines you need to complete.”

Since you are not going bankrupt, you would check box 1b.

The IRS also provides the following advice, “Check the box on line 1b if the discharge of indebtedness occurred while you were insolvent. You were insolvent to the extent that your liabilities exceeded the fair market value (FMV) of your assets immediately before the discharge. For details and a worksheet to help calculate insolvency, see Pub. 4681.

Example. You were released from your obligation to pay your credit card debt in the amount of $5,000. The FMV of your total assets immediately before the discharge was $7,000, and your liabilities were $10,000. You were insolvent to the extent of $3,000 ($10,000 of total liabilities minus $7,000 of total assets). Check the box on line 1b and include $3,000 on line 2.” – Source

See also  How to Claim the Insolvency Exemption for Canceled Debt Reported on Form 1099-C

If your liabilities are greater than your assets after the forgiveness of your debt, as shown in the example above, you should not fear calling the IRS for any advice or lingering questions you might have. Just be patient when you call 800-829-1040.

Sincerly,
Steve

You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.


Damon Day - Pro Debt Coach

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