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Home > Reader Questions > What Are The Ramifications of Tax Penalties for Credit Settlements? – Terrt

What Are The Ramifications of Tax Penalties for Credit Settlements? – Terrt

Due to layoff, I was unable to pay my debts, so we quit paying everything and saved our money to start negotiating debt settlements…which we have now accomplished, but only through cashing out our entire retirement and all other savings we had accumulated. we have settled about 300,000 including 205K in equityline debt, but am currently still settling on loan modification on mortgage. I now have full time job, and will need to start re-investing back into retirement savings, but am worried about the amount I’ll have to fork out for taxes at this point.

Does anyone know if the tax ramifications on this type of issue was addressed by Congress during this whole economic crisis? I know I’m not alone in this boat. I understand that there can be income amounts added to my actual due to the “forgiven” amount that we settled as well as tax issues on the funds we used for emergency to payoff the settlement amounts…are we totally screwed now?

Terrt

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  • ComplianceSlave

    http://www.irs.gov/individuals
    I believe the banks have 3 years to 1099 you. The forgiven debt over $600 per account can be taxed. The IRS rules are difficult to understand but MY OPINION from what you have said, is that your debts outweighed you assets, which is the simplest definition of “insolvency” by the IRS. In the event that is true, it is likely with Form 982 you will not have a tax liability on the unsecured debt. I am less familiar with mortgage debt forgiveness, but the link above should explain it.
    Direct your tax professional to that form.

  • http://www.ftc.gov ComplianceSlave

    http://www.irs.gov/individuals/article/0,,id=179414,00.html
    I believe the banks have 3 years to 1099 you. The forgiven debt over $600 per account can be taxed. The IRS rules are difficult to understand but MY OPINION from what you have said, is that your debts outweighed you assets, which is the simplest definition of “insolvency” by the IRS. In the event that is true, it is likely with Form 982 you will not have a tax liability on the unsecured debt. I am less familiar with mortgage debt forgiveness, but the link above should explain it.
    Direct your tax professional to that form.

  • Taxwork

    As an Enrolled Agent, I can tell you that one can exclude the amount up to the original loan amount to purchase the home. You can use IRS form 982 to exclude it.

    But, if one re-financed and took out money to pay credit cards, buy a car, take a vacation, that amount is taxable. You will either get a 1099A or a 1099c from the bank. BUT, I have found that many banks have lost control of their paper work and have told people that will not issue any form. And that case you are home free.

    There is also an insolvency option. This information is VERY GENERAL , thus make sure you talk to an experienced tax person regarding your particular situation.

  • Taxwork

    As an Enrolled Agent, I can tell you that one can exclude the amount up to the original loan amount to purchase the home. You can use IRS form 982 to exclude it.

    But, if one re-financed and took out money to pay credit cards, buy a car, take a vacation, that amount is taxable. You will either get a 1099A or a 1099c from the bank. BUT, I have found that many banks have lost control of their paper work and have told people that will not issue any form. And that case you are home free.

    There is also an insolvency option. This information is VERY GENERAL , thus make sure you talk to an experienced tax person regarding your particular situation.

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