Forgiven debt

Income Tax, Council Tax, National Insurance and VAT issues.

Forgiven debt

Postby holy vehm » Mon Jul 18, 2011 8:19 am

When a 'person' settles a debt with a bank ect it is often called a forgiven debt. This is actually misleading. In the uk after a certain period of time a 'person' is forgiven for their debts and is given a clean slate with which to start the process of credit accumaltion again.

But, for those in the states and possibly here, settlement is taxable income for the settler. The bank recieves around 40% of the original debt with the taxman taking upto 50% depending on the size of the debt. This tax process starts in the states at $600 upwards and applies to any debt settled in less than full.

If you've been struggling with the rest of the economy, chances are you've been forced to rethink your financial priorities. And as a result, credit cards are often the first thing to go.

The good news is that once you get behind, many credit card companies will offer to "settle" your account, some for as much as just 40% of your original balance. And if you're looking at a large chunk of credit card debt, making it go away for 40% of its value sounds like a pretty good deal.

But before you write that check, there's a little detail you need to know: in many cases, credit card companies can report that unpaid amount to the IRS and – this is the kicker – you'll have to declare it as income.

Wait a minute, you're saying. We made a deal. I settled that account and I even have a letter from my credit card company saying it was "settled in full." I shouldn't have to pay anything else.

And to that extent, you're right... you don't have to pay anything else... at least not to the credit card company.

But using the same laws that allow the IRS to tax you on gifts and prizes, if the unpaid portion is more than $600, the IRS considers it to be income and that income is reported on a Cancellation of Debt Form 1099-C.

That means that while your debt with the credit card company has been satisfied, you may stil have to pay Uncle Sam for getting such a great deal.

For example, let's say you had a $2,000 debt that you settled for 40% or $800. Your unpaid balance – the amount the credit card company agreed to "forgive" – would then be $1200.

At the end of the year (or whenever they do their reporting), the credit card company would report that amount to the IRS as a "forgiven debt" and send you a 1099-C to file with your individual tax return.

Now, whether or not you'll actually pay taxes on that amount will of course, depend upon your individual situation and the amount of debt being forgiven.

For most, a $600 increase in income isn't going to make a big difference in your taxable income but a bump of several thousand dollars just might. And if you consider that the average household has just under $10,000 in credit card debt and access to almost $20,000, it's not hard to see where a generous "settlement" offer might be considered during hard times.

Now, i dont know if this applies to the Uk, i assume it does because the UK isnt likely to miss out on this extra income. I have heard much and read much on settlement, i have even considered playing the game with them, but what i didnt know was the tax that is applied, thus making the point of settlement pointless. Most people are PAYE so making it impossible for a 'person' to avoid paying. I would say that once you have settled with the bank, you make yourself liable with the tax man. In their eyes, you have recieved a benefit, thus it is taxable.

So, do not enter a settlement, you save nothing of any worth while amount, you become liable to the tax man and he isnt going to let go.
"A ruler who violates the law is illegitimate. He has no right to be obeyed. His commands are mere force and coercion. Rulers who act lawlessly, whose laws are unlawful, are mere criminals".
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holy vehm
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Re: Forgiven debt

Postby newmannewy » Mon Jul 18, 2011 9:04 am

That is sickening.. I do see their logic.. But its a sick game from the start! - My own personal site dedicated to helping newbies wake up and see the bigger picture.
Feel free to pass comment, point out my failings & or generally critisice - (It's a working progress)
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