declaring insolvency to irs in response to 1099-C received

[kneesaasmom]

What is the name of your state? Pennsylvania, but I lived in New Hampshire in 2005 during the time in question, if that matters.

I settled two outstanding credit card debts in early 2005 totalling 9750 in payments on 35682 in debt. My total debt equaled 67870, credit cards, car and the 9750 my Mom lent me to settle the two debts that were outstanding. The remaining debts were not overdue and so I continue to make timely payments to them. In this way, I avoided bankruptcy and am learning an expensive lesson. I received 1099 - c forms from the two creditors that I settled with for the balances "forgiven". I own no real property or any assets. Is this explainable to the IRS, so that I don't have to pay additional taxes on this money? I earned 26000 last year, not including the 1099-c money, which would increase my income by 25750, almost exactly double my earnings... Help. I am a divorced single and cannot borrow another cent from family as I still need to figure out how I will pay back the money already lent me. Thanks in advance.

[LdiJ]

Originally Posted by kneesaasmom

What is the name of your state? Pennsylvania, but I lived in New Hampshire in 2005 during the time in question, if that matters.

I settled two outstanding credit card debts in early 2005 totalling 9750 in payments on 35682 in debt. My total debt equaled 67870, credit cards, car and the 9750 my Mom lent me to settle the two debts that were outstanding. The remaining debts were not overdue and so I continue to make timely payments to them. In this way, I avoided bankruptcy and am learning an expensive lesson. I received 1099 - c forms from the two creditors that I settled with for the balances "forgiven". I own no real property or any assets. Is this explainable to the IRS, so that I don't have to pay additional taxes on this money? I earned 26000 last year, not including the 1099-c money, which would increase my income by 25750, almost exactly double my earnings... Help. I am a divorced single and cannot borrow another cent from family as I still need to figure out how I will pay back the money already lent me. Thanks in advance.

First...don't report the 1099Cs on your 2005 tax return. You won't be reporting them because you were insolvent.

Put together a "net worth" statement for the period in question. Do a google search on net worth statements....but its basically a full list of your total debts, and a full list of your total assets (with account numbers, addresses of your creditors etc.)....the difference between the two (negative or positive) is your net worth. If your net worth is negative, you are insolvent.

Please realize that things like cars, homes, or any other physical object can be both an assets and have a corresponding debt.

Keep the net worth statement handy to provide to the IRS if they question your return. Provide it to them to prove your insolvency if necessary.

[kneesaasmom]

I can't thank you enough for the information you have offered. I do have a couple of additional questions, though, if you don't mind.

I created a crude version of a net worth statement which enabled me to quote my debt figures. I will search the internet for a more appropriate form to use, thanks. I did not calculate the resale value of my vehicle which was 6200 versus the 10545 which I still owed on it at the time. Would I then subtract the difference in it's value from my total debt obligation? In doing so, my total outstanding debt after the payoff would be 25988, $236 more than the "income" of 25752 "made" from my debt settlement... (weirdly coincidental...)

Also, will I be placing my Mother at any sort of tax risk or danger for her having lent me the money that she did? (She lent me 13,000 total which provided me the cash I needed at the time to secure an apartment and get moved there, as well as 9750 to the two cards.) There is no formal loan repayment paperwork drawn up on this - it's more a matter of honor. Would she be less vulnerable if I did not include the loan in my debt calculations?

Other than the car, I can think of no other assets. I have nothing but rudimentary furnishings and clothing, elsewise. I am currently back to my mother's, now borrowing a room at her home til dust settles and I can stand on my own two feet. What a mess I am in.

I am terrified the IRS is going to send me to jail or (perhaps worse...) demand the 25752 as taxable income...

I am sorry to be so needy of your help, but cannot tell you enough how useful your information is to me! I believe I may sleep tonight, for the first night in many!

Thank you again.

[LdiJ]

Originally Posted by kneesaasmom

I can't thank you enough for the information you have offered. I do have a couple of additional questions, though, if you don't mind.

I created a crude version of a net worth statement which enabled me to quote my debt figures. I will search the internet for a more appropriate form to use, thanks. I did not calculate the resale value of my vehicle which was 6200 versus the 10545 which I still owed on it at the time. Would I then subtract the difference in it's value from my total debt obligation? In doing so, my total outstanding debt after the payoff would be 25988, $236 more than the "income" of 25752 "made" from my debt settlement... (weirdly coincidental...)

Also, will I be placing my Mother at any sort of tax risk or danger for her having lent me the money that she did? (She lent me 13,000 total which provided me the cash I needed at the time to secure an apartment and get moved there, as well as 9750 to the two cards.) There is no formal loan repayment paperwork drawn up on this - it's more a matter of honor. Would she be less vulnerable if I did not include the loan in my debt calculations?

Other than the car, I can think of no other assets. I have nothing but rudimentary furnishings and clothing, elsewise. I am currently back to my mother's, now borrowing a room at her home til dust settles and I can stand on my own two feet. What a mess I am in.

I am terrified the IRS is going to send me to jail or (perhaps worse...) demand the 25752 as taxable income...

I am sorry to be so needy of your help, but cannot tell you enough how useful your information is to me! I believe I may sleep tonight, for the first night in many!

Thank you again.

Ok...first...the IRS is NOT going to send you to jail. That is simply not going to happen. You aren't even violating the tax codes and you aren't important enough (you won't set an "example") to be sent to jail even if you WERE violating the codes...which again, you aren't.

The "income" from the 1099 C should not be included in your net worth statement. The negative value of your car SHOULD.

No..you are not putting your mother at any risk.

A net worth statement lists all assets (the resale value of the car is an asset) and then lists all liabilities/debts (the amount you owe on the car is a liability). Your net worth is the difference between the two....positive or negative. What you owe your mother could also be included on the debt/liability side.