Legal Question in Credit and Debt Law in Pennsylvania

You have 2 separate issues here. I am not a tax attorney and you need to speak to a CPA or tax attorney. However, I do not think your relative can issue you a 1099c (cancellation of debt) unless the relative in good faith tried to collect on the debt. You do not address what efforts you made to pay the debt. I don't know what steps you would take with the IRS if a creditor wrongfully issues a 1099c. Again, you need to ask a CPA or tax attorney. i have just not had thaqt happen.

Many of my clients get issued 1099cs properly. Let's assume it was proper here. The question is not whether you have to pay back any money to your relative but whether you need to pay taxes on the forgiven sum to the IRS. I wrote an article about this at my website, www.rachelhunterlaw. In there I explain how this works. If the 1099c was proper, you would include the forgiven amount as income. Depending on your assets and debts, you can use form 982 to exclude some or all of the forgiven debt. If it is all excluded, then you do not pay taxes on it all. If some is included, you only pay tax on the forgiven amount. Worst case scenario is that you can't exclude it and you would have to pay taxes to the IRS as if you made an extra $5000 last year. Again, see a CPA to determine how much of the income you can exclude.

Your second question relates to the enforceability of the loan by your relative. Assuming that PA law applies and that your relative made a demand for payment and never followed through with any further efforts, the statute of limitations should have begun to run at the latest as to when the money was owed or demand made. If that has been 4 or more years, then collection of the debt is barred by the statute of limitations and you no longer would have a legal duty to pay. You may have a moral duty but as a 1099c was issued, if you paid back the relative now they would have to file an amended 1099c and it would be more of a headache. So I would not pay at this juncture.

As I have stated. I would see a cpa or tax attorney to discuss the tax ramifications. I am also concerned here that the relaqtive may have acted improperly.