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Debt Relief – Insolvency – Bankruptcy Information » Bankruptcy Help, Insolvency » Debt Settlement and the IRS – How to Figure Out If You’re Insolvent at the Time of Pay Out

Debt Settlement and the IRS – How to Figure Out If You’re Insolvent at the Time of Pay Out

When any financial institution settles a portion of your debt, then they issue a 1099-C. This 1099-C reflects the amount that has been settled. The IRS will consider the amount mentioned in 1099-C as taxable. This tax can only be avoided if you can prove insolvency at the time of settlement. In order to do this you will have to follow a few steps.

First you must compile all your 1099-C and get the total amount that has been settled or cancelled by your creditors. Let’s say you had a debt of $ 10,000 and creditors settled it for $ 5000. At the time of settlement your creditor will issue a 1099-C with $ 5000 mentioned on it. As per rules, any settlement amount above $ 600 has to be informed to the IRS. The IRS will treat this $ 5000 as an income. Now you need to make a list of all your assets. Anything valuable which can be sold for cash is an asset. This list will include your house, car, jewellery, and any other valuables. Next to each item you have to put a fair market price of that object. Make a list of all your liabilities including your debts.

Now you can use this data to create a financial statement. You will have to create a table to compare your assets with your liabilities. If the amount of liabilities in dollars exceeds the asset value at the time of settlement, then you are insolvent by the amount with which liabilities exceed assets. Let’s say your assets worth is eighty thousand dollars and your liabilities are worth a hundred thousand dollars then you are insolvent by twenty thousand dollars. Now if you have received a settlement worth twenty five thousand dollars then you need to pay tax for five thousand dollars only.

The Writer is research analyst with Financial Solutions, which is an organization that helps overextended consumers with manageable debt settlement plan.


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