charge off could become BIG problem with the IRS

What is the name of your state? florida**************when the CC give your debt a charge off it now become income as far as the IRS is concerned? Say if the CC charge off $40K you would now owe the IRS taxes for $40K+$20K income (or whatever you earn) ,it could put you in a 25% or higher tax bracket and you would owe uncle sam $15K in taxes.( 40k+20k) This could happen if your BK is dismissed or you never file.Trouble either way....

[Ladynred]

There's nothing new about this, the IRS calls it 'cancellation of debt income' and anything over $600 qualifies. You're right, its a real trap if you have huge amounts that are not discharged in a bankruptcy.

heres a question ,have you ever looked into this. Lets say a person hasa 40k capital gains loss ,we all know you can apply it against a capital gain and it becomes a wash,but can you use that loss against a charge off ????????

I'm not an attorney, but I am pretty sure that it is only considered income to the extent that it makes you solvent. If after the charge off you still have a negative net worth then you should be fine, though you may need to prove that you were in the red.

[Ladynred]

Sorry, but that's incorrect. I have researched.
If a debt is cancelled, the creditor issues a 1099-C, "Cancellation of Debt", which you would file with your taxes. If you are relieved of an amount of debt over $600, it is reported to the IRS and you pay income tax on it.

I don't think the charge-off generates this, since that is purely an accounting function and you still have the debt, it just goes to a collection agency. If you make a settlement, however, that will certainly mean cancellation of some portion of a debt.

The creditor may be required to file the 1099 for debt excused over $600, but whether or not tax is due is based on insolvency. See IRS Publication 908. A tax attorney on another list confirmed this position in an older post.