1099c's and taxes?

Question

During my divorce my ex was ordered to pay me 7500.00 whihc was half of the credit card debt. Since he rarely worked and his credit sucked ( which thanks to him mine now does), all the cards were in my name with him just as an authorized user. Our debt was about 15,000. After the judgement against him, he has quit his job and has not paid his judgement against him to me. My lawyer says there is nothing i can do until he goes to work and i can garnish his wages. That these cases are easy to get the judgement but hard to collect the money. I have since negoiatated with all 4 companies and paid these cards off by doing a settlement with them, I paid in full about 50% total of what we due as each company offered me a different settlement amount. I heard that if i owed ( liabilities) more than i owned ( assets) at the time of the divorce that i do not have to claim this income and file these 1099cs i have read about..is there any truth to that??..i sure hope so...

Answer 1

Sort of.

When/if the credit cards debt is written off, you will receive a 1099-C. At that time you will sit down and list everything you own (including retirement accounts, pensions, clothing, cars, furniture, etc) at fair market value and everything you owe (including the credit card debt). If you owe more than you own, this is called insolvency and you are allowed to exclude the debt up to this amount.

Part II, it's not really excluded. You have to do go through the list AGAIN using book value (what you paid) vs. the remaing debt (not including the credit card debt). If the remaining debt is more than the book value, stop. If not, start writing down the values of the assets until either you've written off the debt or the remaining debt is more than the remaining book value. You keep this list. Because if you ever sell any of these items, you must use the new book value and if there is a gain, report it as ordinary income.

You attach these lists to form 982 and attach it to your 1040 for that year.

Answer 2

If you are insolvent at the time of the Cancellation of Debt (COD) the forgiven debt is not taxable to the extent that you are insolvent. Your financial situation at the COD, not your divorce, is what matters.

You need to file Form 982 with your return, along with a statement of your assets and liabilities at the time of the COD to establish your insolvency. To the extent that you are insolvent the COD income isn't taxable. For example if your assets totaled $15k and your liabilities totaled $20k, you'd be insolvent by $5k. In that case, $5,000 of the forgiven debt would not be taxed but $2,500 would be.

The calculations on this can get tricky. I would highly suggest that you consult with a qualified tax expert on preparing the statement of your assets and liabilities. Don't trust that to a storefront tax prep mill.

However there is another consideration here. If the total tax on the forgiven debt is less than the cost of hiring an expert to sort it out for you then it would make more sense to just pay the tax and forget the whole mess. For example, if you're in a 15% tax bracket the tax on a $7,500 COD would be $1,125. If professional assistance costs you more than that, it's hardly worth pursuing.