Cancellation of debt paid off

[Avs19]

Hi,

My client had 50K in credit card debt. She paid off 25K and the remaining 25K was transferred to New Credit America, which appears to offer personal and debt consolidation loans. In 2022, she paid off the remaining 25K loan balance but received 25K in 1099C's. She was not insolvent.

I would assume that the cancelled debt is not taxable since she paid off the loan. Any ideas on how to report this on the 1040?

Thanks!

[BobKamman]

Did New Credit America negotiate a settlement with the banks for less than the $50K owed?  Then did the $25K she paid to NCA include interest and fees?  Come back and tell us when you have the rest of the story.  

[Skylane]

<< I would assume that the cancelled debt is not taxable>>

...is something of a scary statement....   because the government will 'assume' that it is taxable. 

Debt consolidation companys negotiate debt forgiveness.... so plan on the income being taxable.

[Avs19]

Some of the documents she provided shows that she paid 25K to the credit card companies and another 25K to the consolidated lender. I'll have to look into the interest and fees. 

[Avs19]

I'll do some more digging but in the end, it doesn't look like anything was actually forgiven.

[qbteachmt]

"but received 25K in 1099C's"

I don't see where you stated who issued these forms, and you implied more than one was issued.

[Avs19]

Five various credit card companies

[qbteachmt]

Oh, this doesn't seem right, then.

"She paid off 25K and the remaining 25K was transferred to New Credit America"

Okay, who did she pay the first part to, and how was the remaining transferred to NCA, and which part(s) was that, and is there a contract or agreement which shows she agreed to borrow from NCA to have the payments made to those companies, and then she repaid NCA; or? This is getting hard to follow over an internet discussion.

Perhaps NCA never sent the payment to the card companies. Perhaps they have her account complete-and-closed documentation and never sent it to her. Perhaps, perhaps, perhaps.

[Just-Lisa-Now-]

Sounds like that company that helped her, kept 25k as their fee, sent 25k to the creditors then the creditors wrote off the missing 25k that they should have got, leaving your client with 25k in canceled taxable debt.

[Avs19]

I requested some more documentation. I'll let you know what I find.

Thanks everyone!

[BobKamman]

You really don't have to get past "the remaining 25K was transferred."  Banks don't transfer debts.  Sometimes they sell them to third parties, but I doubt that's what happened here.  NCA negotiates settlements.  The banks accepted $25K. They probably would have done that without NCA's involvement, but it's not our job to tell her what she should have done.  With money management skills like that, she wouldn't listen anyway.  

[taxes96786]

When a 1099c is issued it doesn't automatically cancel the actual debt. The issuer determines whether the debt is cancelled or whether it is still owed. The 1099c indicates that the issuer, for reason, has determined that the debt was uncollectable at the time the 1099c was issued. If the issuer receives payment for the debt, after that time, then it is income to the issuer.

[BobKamman]

Previous winners of the Non Sequitur Award are not eligible for this week's competition.  

[Avs19]

What happens to the individual paying off the debt? Still taxable?

[Skylane]

Get the statements from NCA.

Was 50K total debt turned over to NCA or was/is there more? Debt consolidation company programs often cover multiple years. They’ll negotiate with a few cc companies one year and a few the next. It took a long time to accumulate the debt… it takes a while to get rid of it… 

[Avs19]

Will do

Thanks

[taxes96786]

What happens to the individual paying off the debt? Still taxable?

it's possible depending on the details