I’ve been cleaning up the last of my debt over the past couple of years. I was planning to go and settle with a defaulted Timeshare at some point. But on Friday I received a 1099-C from the Timeshare canceling my $9500 balance on my debt. While on the one hand this is great news, it brings up a few questions.
1.) Will the 1099-C serve as enough proof of the debt being gone if it ever gets sold to a Collection Agency?
2.) If the Timeshare was resold, can they tax me on the whole balance? Is it worth fighting for?
The 1099-C is always a confusing issue. Many get it confused with some sort of termination of the debt. That’s not true. The 1099-C reporting of a cancelled debt is a tax obligation and does not invalidate the original underlying debt.
The debt can most certainly be sold to another party and the debt buyer may attempt collection and even sue you unless suit is prohibited by the statute of limitations or time-barred.
If you have to pay tax this year for the forgiven debt and latter repay the debt, you can get some tax money back from the IRS. In IRS publication 525 they say:
Repayment of canceled debt. If you included a canceled amount in your income and later pay the debt, you may be able to file a claim for refund for the year the amount was included in income. You can file a claim on Form 1040X if the statute of limitations for filing a claim is still open. The statute of limitations generally does not end until 3 years after the due date of your original return.
If the timeshare is resold it seems to not be material to their claim they forgave your obligation to them for the debt. The sale would not offset your tax liability and really that’s all we are talking about here with a 1099-C.
They should not report the forgiveness of more than the balance owed at the time the 1099-C was issued.
As I’ve published before:
“The court found that despite the statements and the 1099-C form, the debtor still had an obligation to pay on the past debt. Additionally, the court found that even if a creditor issues a 1099-C form, the form does not prohibit the creditor from pursuing collection of the old debt. Only a discharge from the Bankruptcy Court has the effect of canceling the debt and removing the debtor’s liability for the debt.” – Source
I’m always interested in alternative opinions on this issue. If you disagree with what I’ve said you should consult with a consumer attorney and/or a qualified tax advisor.
Please post your responses and follow-up messages to me on this in the comments section below.