What is Federal Form 1099-C?

Do not be surprised when months after you have made a settlement with one of your creditors a letter arrives from the credit card company containing a Form 1099C.

The Internal Revenue Code provides that when banks and some credit card companies “forgive” or “discharge” more than $600.00 of a person’s indebtedness they must send a Form 1099-C to the Internal Revenue Service, with a copy to the taxpayer, advising them of the amount discharged. The savings, which is the difference between what is owed and the amount of the settlement, is treated by the IRS as “Income from Discharge of Indebtedness” (IRS Code S.108). For example, if you owe $5,000 to the Bank of America and settle the debt for $2,000 you will receive a 1099-C from the Bank of America for $3,000. This does not mean that you owe the Bank of America $3,000, it simply means that this is the amount of debt that was “forgiven” by the Bank. You do not owe this money to the Bank and they will not attempt to collect it from you. A person receiving a 1099-C is then supposed to report that amount as income on their Federal income tax return.

There is, however, one very important exception to this reporting requirement. If you were “insolvent” at the time the settlement was made then you do NOT have to report the amount stated in the 1099-C on your Federal Income tax return.
The term “insolvent” means that your liabilities (the amount that owe to all of your creditors) are equal to or exceed your assets. In order to figure this out you add up everything you owed just before the settlement. This includes the full amount of the debt before settlement, all mortgages, bank loans, automobile or other secured loans, credit card and all other bills or debts of any kind (even the $500 that you borrowed from a friend) and then add up the fair value of your assets at the time of the settlement. If the amount of your debts exceeds the value of your assets you are “insolvent” and you do not have to report the amount of the 1099-C on your income tax return. Be careful, however, since you do have to report savings that exceed your insolvency and this balance is taxable income. In other words, if you are “under water” by $5,000 (your liabilities exceed your assets by $5,000) and the settlement saved you $6,000 then you have to report $1,000 of income. If you ignore the 1099-C when you file your tax return for that year, you will get a friendly letter from the IRS the following year with a recalculation of your taxes and a demand for payment with interest.

How can you establish to the IRS that you were insolvent immediately before the discharge? You should file IRS Form 982 and a financial statement as of the day before the settlement that led to the 1099C. These have to be included with the tax return.

If your tax return was filed before you received the 1099-C or did not know what the 1099-C meant and now have to answer the IRS collection letter, we recommend the same. Check off the box on the IRS letter that asks if you have a defense, etc., enclose a letter saying that you were insolvent immediately before the discharge of indebtedness and enclose a balance sheet showing that your liabilities exceeded your assets.

It is important to keep a file when you settle any debt including your most recent bank statements, a list of assets and their fair market value that you own at the time of the settlement and the list of liabilities. If you own a car, for example, the Kelly Blue Book (available on the internet or at car dealer) should show its fair market value. This would go on the asset side of your or financial statement, and the amount you owe on the car would go on the liability side. Make sure you include all debts so that your insolvency will exceed the settlement savings.

Please note that this general guide is not intended to be specific tax advice nor should you rely upon it to the exclusion of consulting with a lawyer, accountant or other tax professional since each person’s tax situation is different.

DNS can provide you with a simple financial statement form and a copy of IRS Form 982 upon request.

If you have any general question about settling debt do not hesitate to call a DNS trained customer service representative.

Richard A. Savrann, Legal Counsel

Some Loopholes in the Credit Card Reform Act

A new federal law the Credit Card Reform Act restricting the ability of credit card companies to change rates and terms on your card will take effect on February 22, 2010. Unfortunately, banks have been very busy changing what they can charge before the effective date of the law (GE Money for example raised their regular rate to prime plus 19%!). Congressman Barney Frank and others have said that perhaps some provisions of the law should be retroactive to prevent a last minute increase in interest rates, however, it does appear likely. Although the banks claim there is no connection between their recent rate increases and the new law, it is hard not be skeptical.

The credit card banks fought the bill and got it watered down somewhat, so it’s clear where they stand. They claimed it will make getting credit more difficult and restrict their willingness to issue credit cards. Our question is - why should these restrictions on changing rates and terms have any effect on a persons creditworthiness.

In any event, hold onto your hat. The higher rates that are coming before the law changes will probably drive more cards into default, and more people will be looking for a way to get out from under the credit burden. At DNS we will watch the trend of defaults closely over the next few months and keep you up to date on what we discover.

Richard Savrann, Legal Counsel
Debt Negotiation Services

Protect Your Identity - It Has Real Value!

You may think that your identity isn't worth very much, but, no matter what your financial condition is your identity can be worth a lot. Thieves may sell your information on the black market or use it to obtain money, credit or even expensive medical procedures. Unless you're vigilant in protecting your records, you'll have to work even harder to repair the damage to your credit. It can take months to rectify the problem. The average identity theft victims spend 30 to 40 hours just writing letters and making telephone calls to try and explain what has happened to them.

Some of the e-threats to your identity are:

Phishing: You get an e-mail that appears to be from your bank or an online service, most often PayPal or eBay, instructing you to click on a link and provide information to verify your account. These emails really come from a thief trying to steal your personal information.
Pharming: or spoofing. Hackers redirect a legitimate Web site's traffic to an impostor site, where you'll be asked to provide confidential information.

Mishing: This is phishing done with text messaging on your smart phone. It instructs you to visit a bogus Web site.

Spyware: You've unknowingly downloaded illicit software when you've opened an attachment, clicked on a pop-up or downloaded a song or a game. Criminals can use spyware to record your keystrokes and obtain credit card numbers, bank-account information and passwords when you make purchases or conduct other business online. They also can access confidential information on your hard drive

Unfortunately, you don't even need to have a computer to become a victim:

Vishing (voice phishing): You get an automated phone message asking you to call your bank or credit card company. Even your caller ID is fooled. You call the number and are asked to punch in your account number, PIN or other personal information.

Bank-card "skimming.": Crooks use a combination of a fake ATM slot and cameras to record your account information and PIN when you use a cash machine. Your credit or debit card also can be skimmed by a dishonest store or restaurant worker armed with a portable card reader. Crooks will steal your wallet or go through your mail or trash.

More than half of identity theft cases involve credit card fraud. Checking accounts are the second most popular target. But some crooks have other plans: At least 250,000 people have been the victim of medical identity theft in the last several years. Crooks use fraudulently obtained personal information to get expensive medical procedures or dupe insurance companies into paying for procedures that were not done. The victims of about 5% of reported identity theft cases are children. The fraud often goes undetected for years -- until the young adult applies for credit.

If you suspect that your identity may have been stolen you must act quickly in order to minimize the damage. This is a problem that will not go away and will certainly get worse as time passes. You may think your identity is not worth anything because you are deeply in debt but you are wrong.

If your your identity has been compromised, place a fraud alert with the three credit bureaus. When you place an alert, you are entitled to a free copy of your credit report. After that, take advantage of the free annual reports the bureaus are required to give all consumers. Stagger your requests so that you get a report approximately every four months.

If you've been phished, contact the bank or company named in the fraudulent e-mail. You also may want to notify the Internet Crime Complaint Center and forward the e-mail to spam@uce.gov.

If you are the victim of identity theft, take the following steps:

1. Make an identity-theft report to the police and get a copy. File a complaint with the Federal Trade Commission. Also, contact the office of your state's attorney general; you may be able to file a report there.
2. Close accounts that have been tampered with. Contact each company by phone and again by certified letter. Make sure the company notifies you in writing that the disputed charges have been erased. Document each conversation and keep all records.
3. Place a seven-year fraud alert or a "freeze" on your credit reports.
4. Begin the process of having the fraudulent information removed from your credit reports.
5. Consider purchasing identity theft insurance. It cannot protect you from becoming a victim of identity theft, but it can help you pay the cost of reclaiming your personal and financial identity.

We are here to help! Click Here To Email DNS and ask for a copy of our client support publication entitled "How to Dispute Credit Report Errors"

Richard Savrann, Legal Counsel
Debt Negotiation Services

Does Credit Repair REALLY Work?

You see the advertisements every day, "Clean up your Credit" or "You can have Spotless Credit" or "Enjoy top Credit". These are the promises of Credit Repair companies and perhaps you have considered hiring one. Before making your decision lets examine what they are and what they can do for you. The first and most important thing you should know is that no credit repair company can guarantee 100% success in their efforts to clean up your credit report. Credit Repair companies are bound by the same laws that you are so the only difference between you and a Credit Repair company is that they know how to use the credit laws to their advantage.

Credit repair companies charge from several hundred to several thousand dollars for their service and because of the vast amount of money that can be made and the large number of people that need credit repair services, this is a business that attracts many con artists. Many credit repair companies open up for business, do a great deal of advertising, collect large amounts of up front fees and then abruptly close the business without doing the work they promised. If you choose to work with a credit repair company be sure that they have been around for a while. Call the Better Business Bureau to check them out and ask for references from the company.

A legitimate credit repair company will carefully explain your rights under the credit repair laws. They should tell you what results you can reasonably expect and not simply promise to clean up your credit. If a credit repair company tells you otherwise, they are making exaggerated claims. If you deal with one of these companies be very careful to determine exactly what they will do for you. Many times you will find that they offer a guarantee which states that they will "improve your credit or your money back". This sounds great until you discover (after spending a lot of money) that all this guarantee says is that they will make your credit better than it was before you went to them. The trick here is that all they have to do is get one late payment removed or changed from a 60 day late to a 30 day late and they have lived up their guarantee since your credit has in fact been "improved", although the improvement is trivial. The moral of this story is - know who you are doing business with.

Robert M. Sriberg, Vice President
Debt Negotiation Services

Beware Of The Pre-Approval Gimmick

When credit-card companies, car dealers and their cohorts try to suck you in by saying you are pre-approved for a loan, they haven't really requested a credit check and they know virtually nothing about your “creditworthiness”. Here are the details you should know about these offers.

You get a letter from a local car dealership that you have been "pre-approved" for an auto loan up to $25,000. The letter said the offer was based on "certain credit qualifying information received from a credit reporting agency." It looks to you as if these folks took it upon themselves to run a credit check on you. Can they do that you ask yourself? Is there anything I can do to put a stop to this nonsense? Why can’t we require that the credit reporting agencies have our permission before releasing our credit data? The answer to these questions is that the car dealership did not actually run a true credit check on you. What it did was buy a list of consumers from a credit bureau that met some minimum credit standard the dealership had set. This is the same thing that all of the credit-card companies do before they send out millions of "pre-approved" credit-card offers to unsuspecting consumers.

Selling such consumer solicitation lists is part of how credit bureaus make their money. The three major credit bureaus, Experian, Equifax and Trans Union, gather huge amounts of information about consumers and then sell this information to their subscribers. Not only do they provide full fledged credit reports, they also provide solicitation lists that are selected by certain criteria specified by the subscriber such as income level, credit score, geographical location or any other criteria selected by the subscriber. Other than using the opt-out service - which reduces but doesn't eliminate such credit solicitations - there's not much you can do. (For those not familiar with the service, it's run by the major credit bureaus and can be reached at (888) 5 OPT OUT. You'll need to enter your Social Security number and other information to identify yourself.)

If you had applied for the loan, then the dealership would have pulled your full credit report and decided whether you were creditworthy. Despite the wording of the notice, you wouldn't be guaranteed a loan. The good news, if there is any, is that these "pre-approved” offers don’t hurt your credit score.

Peter W. Saiger, President

Debt Negotiation Services