What Does it Mean When a Creditor Sends You a 1099-C Form?
When you do not pay your bills, the credit card company usually gets after you about it. Eventually they will get the collection agencies involved if you do not respond to their inquiries. After it is all said and done, you may file for bankruptcy, or you may be able to negotiate some other form of payment that both you and your credit card company can handle.
But if, in the long run, you just cannot pay your debt, your credit suffers. Along with some form of punishment or another, you are no longer obligated to pay the debt. Around this time is when you may receive a 1099-C form.
What Is a 1099-C Form?
So you may be standing next to your mailbox looking over this form in your hands, wondering what it is, and what your credit card company wants to squeeze out of you this time. What does it mean when a creditor sends you a 1099-C form anyway? A 1099-C form is a form that basically states formally that your debt is forgiven.
What?
If you have owed money on your credit card, have resorted to the fact that you will never be able to pay it back, and go bankrupt or choose a similar escape, the credit card company will write your debt off. This means that the legally relieve you of that debt that you owe to them on your credit card. This 1099-C form is the legal document that states this to be true, giving you and they proof of the debt forgiveness.
What About the Money?
When you receive such a form, your debt, as we have established, is forgiven. However, because you bought things with this money and did not pay it back, you must count it as income. When you fill out your tax forms, you must include the amount of money that was part of your forgiven debt as income, because really, that’s what it is… free money to you.
Of course there are the prices you have to pay, so that in all actuality it is not free. Your credit reputation is damaged for a very long time, and any chances of you getting a mortgage or a large loan are very slim. You can, however, with credit cards and other forms of credit, build your credit back up to a descent number now so that when that penalty is removed from your credit report, you will have perhaps even better credit than you did before.
Paid in Full
If you end up settling your debt for a lower price than what you originally owed, the credit card company will accept less and still record that you “paid in full”. When this occurs, make sure that they do not report the remaining amount of debt to the IRS making you count it as income. If they report that you have paid in full when the debt paid was a smaller amount that the original, you still do not have to count that as income on your taxes, because they have accepted that as full payment rather than partial.