Debt Settlement and 1099 Reporting

[Vlad]

New Jersey

In late 2002 I defaulted on 3 credit card accounts, total of about $40K. Last payments were in early 2002. I do not own a home, and I have had little income (well below the median for NJ) since then. The accounts were sold and re-sold several times. Just before the bk law change in Oct '05, I consulted with an attorney who advised I file. I did not. In December '05 I settled with two of the three for about 25% of the defaulted amount. In the third case, the original defaulted amount of $20K has grown (and is being reported to all three credit bureaus) to about $35K. They are now willing to accept $4K. I initiated contact with all three to settle. None of them has ever taken any action to seek a judgement against me.

Question 1: I have been told that by law (federal?), when they issue me a 1099 for the written off amount, they must drop the default interest. Example: the $20K account settled for $4K will result in a $16K 1099, not a $31K 1099. Is this true?

Question 2: The card holder contract includes language such as, " ...we [bank] reserve the right to waive penalties, fees, at our discretion and to change the interest rate with sufficient prior notification to card holder..." Under this contract language, can the current account holder (collection agency) waive these fees as part of the debt settlement negotiation process, resulting in a lower reported 1099 amount? Can interest be waived also? Are there any federal tax law restrictions on what can be waived?

Question 3: Since my last payment in 2002, I have lived in NJ and also PA. I am told that the Stat of limitations in PA is 4 years. Can I simply move back to PA and wait until after the Stat of Lim has expired(2-3 months), and tell the third guy to take a hike? I tried to settle with all three before the end of 2005 for tax reporting reasons, but the third guy screwed me around.

Thanks for your help.

Vlad

 

[seniorjudge]

New Jersey

In late 2002 I defaulted on 3 credit card accounts, total of about $40K. Last payments were in early 2002. I do not own a home, and I have had little income (well below the median for NJ) since then. The accounts were sold and re-sold several times. Just before the bk law change in Oct '05, I consulted with an attorney who advised I file. I did not. In December '05 I settled with two of the three for about 25% of the defaulted amount. In the third case, the original defaulted amount of $20K has grown (and is being reported to all three credit bureaus) to about $35K. They are now willing to accept $4K. I initiated contact with all three to settle. None of them has ever taken any action to seek a judgement against me.

Question 1: I have been told that by law (federal?), when they issue me a 1099 for the written off amount, they must drop the default interest. Example: the $20K account settled for $4K will result in a $16K 1099, not a $31K 1099. Is this true?

Question 2: The card holder contract includes language such as, " ...we [bank] reserve the right to waive penalties, fees, at our discretion and to change the interest rate with sufficient prior notification to card holder..." Under this contract language, can the current account holder (collection agency) waive these fees as part of the debt settlement negotiation process, resulting in a lower reported 1099 amount? Can interest be waived also? Are there any federal tax law restrictions on what can be waived?

Question 3: Since my last payment in 2002, I have lived in NJ and also PA. I am told that the Stat of limitations in PA is 4 years. Can I simply move back to PA and wait until after the Stat of Lim has expired(2-3 months), and tell the third guy to take a hike? I tried to settle with all three before the end of 2005 for tax reporting reasons, but the third guy screwed me around.

Thanks for your help.

Vlad

Standard answer on expired SOL and/or validation and/or dispute letters. There are thousands of posts similar to yours on this forum so I have prepared a standard answer.

SOL (Statutes of limitation are DEFENSES to lawsuits; they do NOT provide a method to stop someone from suing you. This defense means when they sue you, you answer with the defense that it is barred by the SOL.)

http://www.bcsalliance.com/y_debt_sol.html

http://www.fair-debt-collection.com/Disputing_Collections/SoL-dispute-letter.html


Validation letter samples you can get at :
www.creditinfocenter.com
and www.creditboards.com


Disputes: You can write a letter of dispute to the three credit reporting agencies.

Go this website to find instructions and samples for how to dispute: http://www.creditinfocenter.com/creditreports/

Sometimes errors are easy to remove and sometimes they stick like glue. It is inexpensive to try and not difficult.

I am NOT a creditor-debtor lawyer; stand by for further help.

I am NOT vouching for the accuracy of these websites!

Debt settlement:

https://forum.freeadvice.com/showthread.php?t=293829

 

[Vlad]

I had already read your standard reply in other threads.

I was really hoping for some guidance on the 1099/debt reduction/tax liability issue.

 

[TigerD]

New Jersey

In late 2002 I defaulted on 3 credit card accounts, total of about $40K. Last payments were in early 2002. I do not own a home, and I have had little income (well below the median for NJ) since then. The accounts were sold and re-sold several times. Just before the bk law change in Oct '05, I consulted with an attorney who advised I file. I did not. In December '05 I settled with two of the three for about 25% of the defaulted amount. In the third case, the original defaulted amount of $20K has grown (and is being reported to all three credit bureaus) to about $35K. They are now willing to accept $4K. I initiated contact with all three to settle. None of them has ever taken any action to seek a judgement against me.

Question 1: I have been told that by law (federal?), when they issue me a 1099 for the written off amount, they must drop the default interest. Example: the $20K account settled for $4K will result in a $16K 1099, not a $31K 1099. Is this true?

If the account value at the time of the settlement is $20k and it is settled for $4k, then, yes, you will receive a 1099 for $16k.

Question 2: The card holder contract includes language such as, " ...we [bank] reserve the right to waive penalties, fees, at our discretion and to change the interest rate with sufficient prior notification to card holder..." Under this contract language, can the current account holder (collection agency) waive these fees as part of the debt settlement negotiation process, resulting in a lower reported 1099 amount?

No. The CA cannot waive line items. They can settle for an amount that doesn't include the line item, but they cannot waive it.

Can interest be waived also?

Same answer as above.

Are there any federal tax law restrictions on what can be waived?

The OC can do whatever they want.

Question 3: Since my last payment in 2002, I have lived in NJ and also PA. I am told that the Stat of limitations in PA is 4 years. Can I simply move back to PA and wait until after the Stat of Lim has expired(2-3 months), and tell the third guy to take a hike?

No. The SOL tolled while you were out of state. Therefore, the SOL is nowhere near over for you. Also, for the amount of money you are talking about, you can be sure they will sue you before the SOL runs out.

DC

 

[Vlad]

If the account value at the time of the settlement is $20k and it is settled for $4k, then, yes, you will receive a 1099 for $16k.


How are you defining "account value?" I said that the defaulted amount was $20K in 2002, but with default interest added, they are now reporting the account as $35K. You did not answer my question: If I settle with them, will they be required by federal law to waive the default interest?

No. The CA cannot waive line items. They can settle for an amount that doesn't include the line item, but they cannot waive it.


Same answer as above.


The OC can do whatever they want.

These statements seem contradictory to me.

 

[Ladynred]

Question 1: I have been told that by law (federal?), when they issue me a 1099 for the written off amount, they must drop the default interest. Example: the $20K account settled for $4K will result in a $16K 1099, not a $31K 1099. Is this true?

A 1099-C "cancellation of debt income' is issued for any amount of $600 or more in 'forgiven' debt. That amount is considered taxable income and must go on your tax return for that tax year. HOWEVER, if you can show that you were INSOLVENT at the time of the 'cancellation' of the debt, then you do NOT have to claim the amount as income. You will need a form 982 to show insolvency.