I settled a debt with a credit card company and have received a 1099C. Is there a way to show I am insolvent?

Question

I became divorced and was unable to pay even the minimum amounts. I used a debt settlement company who told me I could show insolvency and not have to claim the 5,000 as income. But I don't know how to proceed.

Answer 1

Although COD is taxable as ordinary income, if you are insolvent the COD is not taxed. You are insolvent if your total debts exceed the value of your total assets.

Add up the total value of everything that you own -- home, cars, bank account balances, clothing, appliances, TV, stereo, tools, etc. Then add up all of your debts including the cancelled debt. If the debts add up to more than the value of your assets, you are insolvent.

If you are insolvent, you do NOT need to claim the COD as income, HOWEVER you should keep accurate records of your assets and liabilities in case the IRS tries to assess tax on the COD amount. Since a Form 1099-C was cut, it would be a good idea to include a financial statement with your tax return that shows that you were insolvent and a note that you are excluding the COD amount due to insolvency.

Answer 2

You have to add it as income on your tax return on line 21 on the 1040. It is considered "other income". You must claim this as income.