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  1. #3
    Join Date
    Oct 2014
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    Default Re: Unpaid Credit Card Debt and 1099s

    Quote Quoting ransomedbyfire
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    I'm getting sued for credit card debt and am considering either 1) trying to negotiate with my creditor (lump sum or ongoing monthly payments) 2) filing bankruptcy or 3) letting the creditor get a judgment and planning to stay judgment proof until the judgment expires in 10 years.

    How would I be taxed in each of these situations, in terms of 1099s for canceled debts?

    When would the taxes be due?

    And how does insolvency play into each of them?
    When a debt you owe is discharged (canceled/forgiven) the general rule is that the discharged debt is taxable income to you in the year that the discharge occurs. Note that expiration of the statute of limitations to sue on the debt can result in debt discharge and thus taxable income for you. For a credit card debt, there are two exceptions to that rule. The first is that debts discharged in bankruptcy are not income. Second, the discharged debt is not income to the extent that you were insolvent (your debts exceeded your assets) at the time the discharge occurs. Note that if you avoid having debt included in income under either of these exceptions you might have to make other tax adjustments (reduction in losses carried forward, reduction in basis of assets, etc) to compensate for that. The rules are explained in detail in IRS Publication 4681.

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