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     | Monday, January 31, 2000 - 12:15 pm  I just got a letter from a collection agency threating to report the amount of the debt to the IRS as income to me via a 1099. They said that if I don't pay the $ 2,500 debt, the IRS considers that the same as if I made $ 2,500 in income. Is this true?
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| | Monday, January 31, 2000 - 04:40 pm That's very true. They can forgive you the debt and report it to you as income via a 1099-C form.
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| | Monday, January 31, 2000 - 04:42 pm Oh on a further note, I'd suggest writing them back and saying, "I'm in a 28 percent tax bracket (or whatever tax bracket you're in) and therefore I'm willing to pay you 28 percent of the debt to consider it satisfied and for you to remove any information regarding this collection from my credit profile."
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| | Wednesday, February 02, 2000 - 05:27 am So, let me get this straight. Frank defaults on his $ 2,000 VISA card. After 6 months of trying to collect, the bill swells (with interest, late charges, etc.) to $ 2,500. VISA sells the account to ABC Collections for 10 cents on the dollar ($ 250.00). ABC adds charges, fees, interest, so 6 months later the bill is up to $ 4,000. ABC gives up and sells to XYZ collections for 5 cents on the dollar ($ 200.00). XYZ add its charges and fees and interest, so now the bill is up to $ 5,000. XYZ gives up after 6 months and sells to LAST CHANCE Collections for 2 cents on the dollar ($ 100.00). Vito adds his "mark-up" so now the bill is at $ 6,000.00. Are you saying that: 1) If Frank pays nothing, VITO "forgives" $ 6,000, reports that to the IRS, which then treats it as $ 6,000 in income, so Frank has to pay income tax (28% of the $ 6,000)? 2) If Frank and Vito "agree" to settle for $ 1000, and Frank pays Vito the $ 1000, Vito can still report "forgiving" the other $ 5,000 to the IRS? 3) What if Frank wants to dispute the fees and "mark-ups" every step of the way? If Frank says "2 years ago I had $ 2000 on a VISA that was charging 18% interest. That would make the bill $ 2860. That is all I owe, take it or leave it. I dispute any amount over that figure of $ 2860).", how would that affect the IRS situation? 4) What if Frank says "I don't owe VITO a dime. I have never done business with VITO. Short of a judgement by a court, my position is that I do not have any business relationship with VITO, thus I owe him nothing." - how does that affect the IRS situation? 5) What is to stop anyone from "reporting a forgiveness" of a debt just to needle someone (an ex-husband, etc.)?
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| | Wednesday, February 02, 2000 - 06:06 am 1099's are issued by creditors only after a debt is SETTLED for less than you owed orginally. This means that the debt is closed out permanently by the creditor. A 1099 is a tax form issued at the end of the tax year for any income you received which didn't have taxes taken out. Other examples of 1099 income are interest income. The thinking behind issuing a 1099 for forgiven debts is that you didn't have to pay all that you owed, and if effect, this is income. If you still owe this debt (for example, it's been charged off or turned over for collection) a creditor can't 1099 you, as there is a chance that you will still repay the debt. If you pay the debt, you will not have "earned" income on this debt.
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| | Wednesday, February 02, 2000 - 06:07 am Sean, I do not have the citation from the IRS code handy, but I remeber reading that the law changed. There were too many people who filed bankruptcy and then found that some of the debt survived bankruptcy indirectly through subsequent 1099s. It is not so unsual for me to have clients with over a quarter million in discharged debt, and I am not one of the big bankruptcy attorneys. I do not want to guarantee this since I do not have the citation in front of me, and I may be remembering it incorrectly. I did call another bnk attorney who agreed that the law changed, but also did not have a citation. TO roughly paraphrase, I think that the change does not allow forgiveness of a debt to be 1099 income IF the taxpayer was insolvent at the time. So if memory serves, then bankruptcy is not required, just insolvency. How to establish that? Don't know. Seems like bnk might create a presumption. Someone should reseach this. If I come across the case on the mess on my desk then I'll post it.
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| | Wednesday, February 02, 2000 - 06:33 am Kristy - so in my example, (2500 original debt now up to 6000 with VITO collection), 1) As long as he doesn't pay ANYTHING, VITO can't 1099 him (because, theoretically, he might pay it off tomorrow), 2) If he and VITO settle for 1000, can VITO 1099 the other 5000, 3) If he sends VITO a cease and desist collections letter, but still never pays it, does the cease-and-desist letter "open the door" for VITO to 1099 it?, 4) what if it is "disputed" (how does disputing a debt affect 1099'ing it), 5) Does this mean that an agreement letter needs to ALWAYS include a cluase prohibiting the creditor/collector from 1099'ing? and lastly, 6) would he be better off "buying" the debt from VITO for 1000 instead of paying VITO 1000 "settlement"? (would that keep VITO from 1099'ing it?) Thanks
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| | Wednesday, February 02, 2000 - 09:52 am Anonymous- Great questions! I, too would like to see the answers. Anyone out there willing to go out on a limb and reveal trade secrets?
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| | Wednesday, February 02, 2000 - 09:58 am Voigtkampff: Obviously I am no specialist on bankruptcy law, that's why I'm glad you're here. And I can see the presumption that if a person is bankrupt and/or insolvent that the rules may change. What is the exact definition of insolvency? I don't know, and I'm not going to try to figure it out. All I can say is imagine a person ("Jane Doe") is doing business with Loan Shark, Inc. ("Shark") and they have extended Jane a loan at 36 percent interest. They are based in a state where there's no usury law. Now Jane is a poor credit risk and (as sometimes happens) something goes wrong. Either she gets mad at Shark because she feels the interest rate is too high, or she buys too many doodads and gets overextended or whatever. So she decides she's not gonna pay the Shark. Now Shark, Inc. isn't especially upset over that. I mean, 80% of his people pay and at 36% interest he is still raking in the dough. On the other hand, he can't just let one person stop paying and get away with it or soon no one will pay. So the Shark has someone give her a friendly little call along the lines of, "Why haven't you paid and is there anything we can do, like lowering your monthly payment, that will get you back in the paying track?" Jane says no thanks, screw you, sue me, you can't get blood out of a turnip and my credit's ruined anyways so go ahead -- report me. Then she hangs up. The Shark wheels his chair over to her file and pulls her last credit report (ran 8 months ago when the account was opened). Sure enough, her credit's screwed. So he shrugs and calls up his collection attorney and sends him over the original promissory note. The attorney gets 40 percent of whatever he collects. After a year he's got a big goose-egg to show for his efforts and he tells the Shark it's not worth suing over because she has nothing and someone else is already garnishing her. So the Shark plays his last card. He calls Jane up and tells her he'll forget the whole matter for 30 cents on the dollar, otherwise he'll forgive the loan and report it to the IRS. She just hangs up on him. So he does it. He fills out a 1099-C form showing that he's given her a gift, reports the debt as "PAID COLL ACCT" to the credit bureaus and calls it quits. What happens then? Well, let's proceed on the assumption that she does not acknowledge that 1099 and she fills out her 1040 as though there was no additional income. Her 1040 will get "red flagged" by the IRS and in a few years they'll schedule her for an audit. At this point she'll either pay or go to "tax court" (which is not really a court, it's more like an administrative review) and she'll present her defense. Let's assume her defense is that she didn't owe the money. In that case a subpoena will be issued to the Shark for the original promissory note and the payment history. Assuming he has his paperwork in order she's sunk and she'll get nailed for the taxes plus interest and penalties. If his paperwork isn't in order she'll be exonerated and he'll get audited and his deduction for the forgiven debt will be disallowed. Either way Uncle Sam wins -- that's why these items are very often audited... Uncle Sam always makes money out of these deals.
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| | Wednesday, February 02, 2000 - 10:52 am So back to the original questions- 1) should an agreement letter ALWAYS include something to the effect that in exchange for paying the agreed sum, NO 1099 will be sent to the IRS? 2) If the debtor is "disputing", is his only recourse to wait until he is audited by the IRS, then let the IRS "decide" the validity of the original debt, and then in turn the validity of the "gift"? 3) If you agree to settle a $ 6000 debt for $ 1000 and pay the $ 1000, can the collector still "1099" you for the remaining $ 5000? If so, should the debtor have "purchased" the debt for $ 1000 instead of "settling" for $ 1000?
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| | Wednesday, February 02, 2000 - 10:54 am I remember that even in the early or mid 90's the "insolvency" defense was suggested to my clients, mostly related to short sales. I doubt that Jane would have to pay the IRS. And that loan shark would have to be an idiot or be really bored to want to get involved with the IRS.
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| | Wednesday, February 02, 2000 - 10:54 am Also, should she never "slam the door" on negotiations, but just keep stringing the Shark along (because the previous posting said as long as you "might" pay, they can't "forgive" it)?
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| | Wednesday, February 02, 2000 - 11:04 am You can forgive a debt whenever you want. Normally this is only done between family members, but believe me it does happen. Forgiving debts as a line of attack happens pretty rarely because the creditor can get the same tax write-off by a charge off, plus bad debts can be sold for pennies on the dollar to collection agencies. It's better to have $100.00 and a $900.00 tax write-off than a $1,000 tax write-off.
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| | Wednesday, February 02, 2000 - 01:03 pm Here's a good link to explain the whole 1099 thing. I was able to grasp the concepts. http://www.wealthnetwork.com/articles/M_Warren/Settling_debt.htm
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| | Wednesday, February 02, 2000 - 01:19 pm So, if you are NOT going to pay it (because it is so old, or you just don't have the money), it sounds like you should "lead them on" whenever possible. (Perhaps offer to pay $ 1 , just so that you can claim "I had a standing offer to settle - they had no reason to take the position that the debt was uncollectable.) It defintely sounds to me that we need to include (as part of a settlement) a stipulation NOT TO REPORT to the IRS. Why hasn't this been addressed with the same vigor as having the negative remarks removed from the credit bureaus?
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| | Wednesday, February 02, 2000 - 01:25 pm It will now. I will include it in my "settling debts" section.
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| | Wednesday, February 02, 2000 - 03:11 pm If you're going to settle debts there are a number of important clauses you should include. This is not intended to be an exhaustive list of those clauses, nor is this intended as legal advice. I'm not an attorney and if you need an attorney then I recommend you retain one. 1. Venue. You should stipulate that the agreement is governed by the laws of whatever state you live in and that your state and county has jurisdiction over the matter. 2. Reasonable attorney's fees. You should stipulate that in the event of litigation the prevailing party is entitled to reasonable attorney's fees. 3. Gift. You should stipulate that any shortfall in your offer from their book or face value is esteemed a gift. This eliminates the whole 1099-C issue. 4. Confidentiality. You should stipulate that the terms of the settlement are confidential. This will put them in hot water if they report the debt as settled for less than amount owed or anything like that. 5. Damages difficult to prove and/or assumed to exist. You should stipulate that both sides agree that the damages for violating this agreement will be difficult to prove. Too often you try to retain an attorney to handle litigation on matters like this and they say, "What are your damages?" This clause can convince an attorney to take your case if you need to litigate. The point will boil down not to, "Are you damaged" but "How much damage did you suffer?"
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| | Wednesday, February 02, 2000 - 03:13 pm Furthermore I'd like to say that having a standing offer to settle for $1.00 isn't going to help you if they decide to do this. All that will happen is instead of reporting $1,000.00 forgiven they'll report $999.00 forgiven and take your dollar.
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| | Thursday, February 03, 2000 - 06:37 am It defintely sounds to me that we need to include (as part of a settlement) a stipulation NOT TO REPORT to the IRS. Why hasn't this been addressed with the same vigor as having the negative remarks removed from the credit bureaus? Are they bound by law to report it to the IRS? You can't stipulate something like that if it requires the creditor to break the law in doing so. I don't know if they are, hence my question to anyone else.
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| | Thursday, February 03, 2000 - 06:48 am Or they might perceive it as though you were looking to pull a fast one. Imagine you're a creditor and someone calls you up saying "Ok, I'll pay you a certain amount but you CAN'T tell the IRS about it." What is that going to make you think?
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| | Thursday, February 03, 2000 - 06:54 am ok then how's this: In exchange for my payment of $ 1,000 you agree that 1) the true value of the account should be $ 1,000, and will be adjusted to reflect that (i.e. you agree that the debt should only have been $ 1,000 all along), 2) my check will therefore pay the debt in full or I "buy" all rights to this debt for $ 1,000. Now you own the debt so there is nothing for the creditor to "forgive"
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| | Thursday, February 03, 2000 - 03:06 pm Talking from experience, Citibank Visa recently sent me a 1099 forgiving $800(after settlement). While negotiating with this creditor, I went as far up the ladder as I could go. The final settlement was 50%, zero balance, "settled" rating. (Before anyone frown, Nordstrom agreed in writing to delete a charge off after a settlement). From my experience, some creditors will agree to a positive rating or a trade line deletion. Others will only agree to a settled rating. Creditors can report anything they want to the credit bureaus. Now, to ask a creditor not to "report" to the IRS! I do not know anyone willing to play games with them. A tax attorney told me that a creditor is obligated to report forgiven debts to the IRS. Just like a merchant is obligated to report a $10k cash transaction. I am about to settle with First USA for 40% on $9k. That could be a 1099 for $5,400 of earned income this year! If anyone is successfull in getting a creditor to agree not to "report" to the IRS, please, let me know.
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| | Thursday, February 03, 2000 - 04:00 pm I like Sean's suggestion about having the forgiveness labelled as a gift. Someone should ask a tax attorney. There is one on my floor. I'll ask him if I ever get over my fear of attorneys. But I have to wonder if it is that easy to stymie the IRS's attempt to tax everything. If it were that easy, wouldn't people label everything, paychecks & stuff, as gifts? And aren't there gift taxes anyway? If Earnest's tax attorney is right, then even if you can get a creditor who is ignorant of tax laws to innocently agree to something unlawful, how do you enforce it? It seems that something like this might be outside of a human's ability to agree to and control. Wouldn't a computer accounting program determine when to send out 1099s? (I was just in Disney's T2 exhibit and I'm still thinking about SKYNET). And here is one for the noodle. I'm neither a tax attorney or a CPA but: Isn't a debt that you owe to a creditor just an account receivable of that creditor? And isn't an A/R just another asset to that creditor? And don't all assets have a depreciable lifespan? So wouldn't creditors report depreciation (losses?) of ALL assets to offset the profits that they made elsewhere - in an attempt to reduce their own tax liability? I know that these are a lot of IFs, but what if that $1,000 has been depreciated over the years and is now reported to the IRS as having a $300 value, and then the creditor forgives it. That means that this asset with a $300 accounting value has been conveyed to the debtor, who must now report it as his/her asset, right? Income. So how could the creditor report it to the IRS as a $1,000 income when it was only $300? Always happy to confuse the issue.
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| | Friday, February 04, 2000 - 04:46 am Earnest: Creditors can report anything they want to the credit bureaus. No, IF they choose to report the are obligated to reporting ACCURATE information. (Before everybody cries, I was addressing the verb 'CAN' in ".. can report .." and not what they DO report and what we have to try to get fixed when it's wrong ... :) ). Sean: Yes, there are gift taxes, and depending upon the type, they are usually at a substantially higher rate than your income tax bracket rate.
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| | Friday, February 04, 2000 - 05:48 am Well, I know sometimes creditors 1099 people and sometimes they don't, (as opposed to employers ALWAYS sending W2's at the end of the year), so that suggests to me that it is, indeed, simply a punitive, negotiating tactic. After all, if I owe a creditor 10,000 today (and am current), then it is worth 10,000 today. If I stop paying today, then a year from now (excluding interest and fees) it is worth less than 10,000. 6 years from now it is worth even less. (I would make the argument that a debt is like a house - it is only "worth" whatever a person is willing to pay for it - if a creditor "sells" a 6 year old 10,000 debt to a collector for 1,000 (10 cents on the dollar), then the debt was only "worth" 1,000. The collector wants 10,000, but you settle for 2,000. Maybe the collector "forgave" 8,000, or maybe the debt not worth 10,000 in the first place (i.e. it was overpriced) and you negotiated. Why don't car dealerships "1099" you when you negotiate 1000 off the sticker price of a car then? I would take the position that, unless you are dealing with the original creditor, then the "debt" is truly an asset to the collector and that you and he are simply negotiating a price. P.S. I GUARANTEE you that if you offer a collector (nearly) full price he would HAPPILY agree NOT to report anything to the IRS. That also suggests to me that the 1099 issue is not a hot issue for the IRS, but is simply a punitive measure by collectors.
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| | Friday, February 04, 2000 - 07:17 am Well, I know that under some circumstances where a debt is settled/forgiven that a 1099-C is in order. I'm drawing from the information contained in Kristy's link above that says: "There are five exceptions stated in the Internal Revenue Code, three of which apply to consumers. So even if the financial institution issues a Form 1099-C or 1099-A, you do not have to report the income if: 1) the cancellation of the debt is intended as a gift (this would be unusual)..." Well, it would certainly be unusual but it's not impossible to stipulate something unusual to be very much the case in a contractual document. And while I'm not trying to say that all gifts aren't taxable. It does seem to me, on the basis of the presented information, that a "gift clause" would be an excellent thing to include in a boilerplate debt settlement agreement.
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| | Friday, February 04, 2000 - 07:21 am Again, why does everyone seem to place a lot of emphasis (appropriately so) on getting a cluase to REMOVE the negative information, but (until now) practically NO ONE ever talks about the 1099 issue? I've never seen it addressed in any credit repair books I have read (Dover, Hibbs, etc.) nor on any of the websites I've looked at.
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| | Friday, February 04, 2000 - 09:38 am Anon- Perhaps the whole 1099 issue is just an "urban myth". Doe anyone have firsthand knowledge of anyone getting 1009'd? If so, what was the dollar amount? I really don't think most collection agencies are even competent enough to initiate one correctly and have it fly. And also, what are the IRS ramifications on the COLLECTOR'S end if they send in the 1099? How does that affect THEIR bottom line? Do the investors in the "agencies" get told of the status of all the 1099's being filed?
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