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What Happens When a Collection Agency Issues You a 1099? – Charlotte

“Dear Steve,

First of all, FANTASTIC WEBSITE!

What happens when you are issued a 1099 from a collection agency? I’m worried come tax time we will owe a lot of money to the IRS. Help!

Charlotte”

The Answer

 

Dear Charlotte,

The only reason you would be issued a 1099 would be if your debt was written off as uncollectible or you settled a debt.

I had the following questions that I’d like for you to answer before I can answer your question. Please post your answers in the comments section of your question. I’m looking forward to helping you for free.

  1. What is your situation?
  2. How much debt is being forgiven?

As soon as you can post the answers to my questions above I’ll be able to help.

If any reader wants to offer advice in the comments section please feel free to participate.


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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Steve Rhode

    The downside to that approach was you lost the benefit of the history on the cards. Your payment history is a big factor moving forward. Now that the cards have been closed you lose the past benefit.

    The best path forward to improve your credit history is to pay as agreed.

    Steve

  • Megan

    This is not true. When I left college, I owed about 5 credit cards ranging from 5k down to 500 dollars. I went through a non-profit group out of Florida and they worked out a deal with all of the credit cards. I would no longer use any of them and for that all of the interests were reduced greatly and the 5k card went to a 0%interest. I paid an agreed amount by money order to that non-profit and they in turn paid each of the cards their due. As each card was paid off, it was closed. I checked my credit b4, during and after and it was never affected by this process. It was the best thing ever to get out of debt that might have become a huge mess.

  • Don

    Steve,
    Regarding Charlotte’s October 2009 posting about a collection agency 1099-c, was there any conclusion about the legality of a collection agency issued 1099-c? Can they do this legally? What are the legal boundaries of doing this? I previously had one in 2008, reported it and paid it. Now a phantom 1099c has appeared from 2008 and no one can clarify what it is at the agency or IRS. I see that statue of limitations exist, original creditors can only send 1099-c, or not? This is very confusing, let alone determining the lititimacy of this debt.
    Don

    • http://GetOutOfDebt.org Steve Rhode

      Don,

      Only the owner of the debt can issue a 1099 since they are the only entity that forgave the debt. It is possible that the debt was sold and owned by the collection industry.

      What do you mean when you can “phantom 1099?”

      Steve

  • http://unitedconsumerpartners.com Aaron R.

    Charlotte,

    I was going to spew all this collections settlement lingo however I changed my mind.

    1. The only thing that will save your credit is to pay on time every time.
    2. I dont believe you will see a collection angency in the near future.

    Lets say you allow it to fall behind to go to collections they are not going to just send it there they don’t do that.
    Why would someone send an account that has the possibilities of generating revenue of close to $30,000.00
    To a collection company who typically buys debts for pennies on the dollar. They only sell the debt if you don’t pay and my dear on 40k they would sue you first unless you live in TX.

    Chase does their own collections they have a main collections dept. in Columbus Ohio where I did settlement and I have friends that work there they typically will not allow an account that high go to collections. I’m sorry this may not help you but here is what I want you to think about and I believe it is in you and your husbands best interest.
    • Look into the equity on your home if your father doesn’t have enough to lend you
    • Barrow against life insurance
    • 401k
    • Any kind of savings
    • Borrow from more than 1 person.
    • If you are current on all of your payments think about doing a fixed rate balance transfer put the funds your father is going to loan you down and dwindle it away in the time you have on your fixed rate typically an account that high I would negotiate a year term.

    The worst thing you could do for your credit is Bankruptcy the second is settlement in my eyes. You will not settle on a current account.

    Hope this helps.

    Aaron

  • Chrissy

    Back in December of 2007, I paid off a debt with a collection agency. I filed my taxes in february. I never received my 1099-c. I was not aware that the 1099-c would be sent. I just got a notice from the Irs stating I owe them 465 dollars since they filed the 1099-c. Can they do this. What can I do?

    • http://GetOutOfDebt.org Steve Rhode

      Chrissy,

      You’ll have to pay the tax due.

      Steve

  • http://www.freedomfromcreditors.com Freedom From Creditors

    Imputed income can only be reported when there is money lent. The collection agency will not have lost any money because they lent nothing. Collection agencies are not in the lending business only the collecting business. Speak with a qualified CPA or Tax Attorney. You should file a complaint with the Criminal Division of the Inspector General’s Office at the IRS and hold the collection agency liable for all damages that might incure from such false reporting. Some times it is wise to pay for a professional debt resolution company that way you can navigate safely through the mine fields of the collection process.

    • http://GetOutOfDebt.org Steve Rhode

      Charlotte,

      A company collecting the debt may be just collecting the debt, but also have purchased the debt and in fact the new owner of the debt and thus be able to issue you a 1099-C. I’d hold off filing complaints until we get to the bottom of this.

      We need to get back to solving your actual problem and not jumping into hypotheticals. Is your debt still with Chase? What are you plans or intentions moving forward?

      Steve

  • http://www.creditcarddebtpro.com Ryan Ortega

    Steve,

    I appreciate your compliments!

    Charlotte,

    Please let either of us know if there’s anything more we can do to help you out, the sooner you get started the more you can begin to save.

    Ryan
    .-= Ryan Ortega´s last blog ..To pay or not to pay that is the question- Tip #1 =-.

  • http://www.creditcarddebtpro.com Ryan Ortega

    Charlotte,

    My first suggestion is to find out how your credit score is now. It is common to confuse a spotless payment history as good credit, however owing $40,000 on credit cards, especially if they are using more than half of their available credit could be hurting your credit score.

    35% of your score is based on payment history, 30% is based on how much you owe, and 10% is based on the type of accounts, revolving ones like credit cards being the worst. Typically the amount owed and type of debt begins outweighs your payment history, causing higher interest rates and lower credit limits and starts to bring down your credit score, not allowing you to borrow anymore, even though you have never been late, and bring in a steady income.

    Also it’s very likely the reason why you owe so much was due to borrowing money so you could remain current.

    Yes there are some downsides to settling credit card debt, it may or may not be the right choice for your situation. If you can have family help you out that’s great, but if you have truly experienced a financial hardship and would like to pay off the debt faster, while avoiding bankruptcy speak with a certified debt arbitrator, and see if debt settlement services are legal in your state, or if they require an attorney.

    Good Luck,
    Ryan
    .-= Ryan Ortega´s last blog ..To pay or not to pay that is the question- Tip #1 =-.

    • http://GetOutOfDebt.org Steve Rhode

      Ryan,

      Thank you, thank you, thank you.

      You can’t imagine how nice it is to wake and see someone give such great advice and care for people visiting here in need.

      And Charlotte, everything Ryan said, ditto.

      Steve

  • Charlotte

    Hi Steve,

    My husband and I currently about $40,000 in debt. My father in law is thinking about loaning us the money to pay for our debt in return we pay him back of course. My husband wants to work out a lower settlement with our credit cards and the person at Chase said they could send us to a collection agency and maybe we would be approved for a lower settlement/payment. Isn’t this the same thing as a debt reduction/management program? I don’t want our credit scores affected and I do not want anything sent to a collection agency.We are current with all our payments nothing is past due.

    Thank you in advance for your time.

    Charlotte

    • http://GetOutOfDebt.org Steve Rhode

      Charlotte,

      Any plan that allows you to payback less than the full amount you owe will negatively impact your credit report and potentially leave you with a lingering tax liability.

      If you want to improve your credit, or not harm it, pay the full amount and don’t let your accounts get past due.

      Steve

      • Megan

        This is not true. When I left college, I owed about 5 credit cards ranging from 5k down to 500 dollars. I went through a non-profit group out of Florida and they worked out a deal with all of the credit cards. I would no longer use any of them and for that all of the interests were reduced greatly and the 5k card went to a 0%interest. I paid an agreed amount by money order to that non-profit and they in turn paid each of the cards their due. As each card was paid off, it was closed. I checked my credit b4, during and after and it was never affected by this process. It was the best thing ever to get out of debt that might have become a huge mess.

      • http://GetOutOfDebt.org Steve Rhode

        The downside to that approach was you lost the benefit of the history on the cards. Your payment history is a big factor moving forward. Now that the cards have been closed you lose the past benefit.

        The best path forward to improve your credit history is to pay as agreed.

        Steve

  • http://www.creditcarddebtpro.com Ryan Ortega

    Hi Charlotte,

    Creditors are required by the IRS to issue a 1099-C when there is a cancellation of debt that is more than $600.

    These will typically come from an original creditor who charges or writes off a debt which usually happens after 6 months or so of non-payment, or when the debt is settled for less than the current balanced owed. For example you owed $10,000 and only paid $5,000 via settlement they would issue you a 1009-C for the remaining $5,000 difference.

    I would consider talking with a tax professional in your local area and inquire about what it is to be insolvent, and/or how form 982 may apply for this situation.

    I’m not a tax pro, but from what I understand if you did not achieve any positive net worth from the debt cancellation, then you shouldn’t be on the hook for any additional taxes, However if you have assets that are completely paid off, or a big hunk of cash hiding in savings, be prepared to shell out a few extra dollars in taxes, or receive a lower tax refund

    I hope you find this useful, and Keep up the good work Steve

    Take Care,
    Ryan
    .-= Ryan Ortega´s last blog ..To pay or not to pay that is the question- Tip #1 =-.

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