The New Year is here and we’re all in the middle of getting used to writing the new date. For many Americans, this is also the time of year when we get our W-2’s from 2018 and get started on preparing our taxes. If you had outstanding debt in 2018 that you ignored, then you may be in for a surprise this tax year.
The 1099-C Form
A creditor or debt collector who has written off or canceled a debt is required to send a 1099-C form to the IRS to report that canceled debt as income for you. This rule also applies when the creditor agrees to accept at least $600 less than the original debt.
So even if you settled a debt paid most of the original balance, the creditor may still report the canceled portion. The IRS will then count this canceled debt as taxable income, making your overall tax bill increase.
Filing for Bankruptcy
Eliminating a debt with a bankruptcy discharge will protect you. When you file for bankruptcy and discharge debts owed to creditors or debt collectors, then you can counteract the creditors’ 1099-C form with your own Form 982.
The 982 form is used to declare that a debt has been discharged and that the debt is therefore not counted as part of your gross income. I’m often asked by people why tax preparers ask if a person has filed bankruptcy and this is one of the primary reasons. Your tax preparer needs to know about your bankruptcy case so he or she can help protect you from canceled debts claimed against you.
Contact a Trusted Bankruptcy Attorney This Tax Season
I’m constantly surprised by the number of people I meet who think that if they just ignore their debt problems for long enough they will go away.
While it is true that creditors may give up trying to collect and simply cancel the debt, the IRS has a long memory. You won’t be able to avoid your debt problems forever, and you may end up paying higher taxes if you try.
At Bond & Botes, we have years of experience helping people resolve their financial problems. If you’ve been ignoring old debts and you want to take steps to clean up your credit history, please contact us today.
We offer free initial consultations at each of our convenient offices in Alabama, Mississippi, and Tennessee. Don’t let bad debts eat away at your tax refund!