Legal Question in Credit and Debt Law in Pennsylvania

Re: When you settle a debt

You asked about taxes which may be due when an account is written down.

Unfortunately it is true. When a debtor does not pay a debt it is written off (or charged off). Most every debt has been incurred for something of value and therefore the debtor has gained in value what s/he failed to pay for.

Eventually the debt is uncollectable or is paid at a negotiated loss. When either event happens then the amount uncollectable is no longer a debt. In the IRS view that debt has left the debtor with an asset of the value of the uncollectable debt. Therefore the value of the uncollectable amount of the debt is taxable as income to the debtor. The uncollectable amount is reported to the IRS as 1099 imputed income and tax must be paid at the taxpayer's rate.

There is one bright spot to this, when such debts are discharged in bankruptcy an amount of the debt is found uncollectable. In bankruptcy the uncollectable amount does not become income to the debtor.

So, unfortunately, you can expect a 1099 from this company in January.

Regards,

Roger Traversa

email: [email protected]

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