I had 2 mortgages from timeshare accounts default a couple of years back. One had the debt discharged in 2018, and the creditor issued a 1099c for the remaining balance. This was included as income in our 2018 return. The second one foreclosed in 2019, and the “credit grantor reclaimed the collateral as settlement of the debt owed.” As a result, both companies show the same balances still owed in our credit reports, adversely affecting our profile and scores.
Can I dispute these with the bureaus to state zero balances? I have a copy of the 1099c issued in 2018, but what supporting documentation do I need to send for the second account? I have no correspondence from the company relating to the settlement and only found out about it upon reviewing our credit reports.
Thank you for your time.
You can certainly dispute any incorrect item on your credit report and see if the reporting entity will respond and update. If they don’t, you might want to talk to a consumer attorney specializing in these issues. One place to find such an attorney is here.
However, the situation might be a bit more complicated. Just because you received a 1099-C does not automatically mean you don’t still owe the underlying debt. The 1099-C is a tax reporting form and not an absolute statement about the underlying debt.
As this attorney says, “However, in 2016, an IRS rule allowed debt collectors to file a 1099-C after 36 months of no payment. In this event, the account is still delinquent, but the debt hasn’t been forgiven, so the lender may still try to collect.
The IRS amended the rule later that year, so creditors are no longer expected to file a 1099-C just because it’s 36 months past due. But it is possible for it to still happen.”
According to the IRS any of these following reasons can trigger a 1099-C.
“A debt is deemed canceled on the date an identifiable event occurs or, if earlier, the date of the actual discharge if you choose to file Form 1099-C for the year of cancellation. An identifiable event is one of the following.
- A discharge in bankruptcy under title 11 of the U.S. Code. For information on certain discharges in bankruptcy not required to be reported, see Exceptions,later. Enter “A” in box 6 to report this identifiable event.
- A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal nonbankruptcy or state court proceeding. Enter “B” in box 6 to report this identifiable event.
- A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired. Enter “C” in box 6 to report this identifiable event.
- A cancellation or extinguishment when the creditor elects foreclosure remedies that by law extinguish or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust is exercised. Enter “D” in box 6 to report this identifiable event.
- A cancellation or extinguishment making the debt unenforceable under a probate or similar proceeding. Enter “E” in box 6 to report this identifiable event.
- A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration (for example, short sales). Enter “F” in box 6 to report this identifiable event.
- A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor’s defined policy can be in writing or an established business practice of the creditor. A creditor’s established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy. Enter “G” in box 6 to report this identifiable event.
- Other actual discharge before identifiable event. Enter “H” in box 6 if there is an other actual discharge before one of the identifiable events listed above.”
The IRS also states, “After a debt is canceled, the creditor may send you a Form 1099-C, Cancellation of Debt showing the amount of cancellation of debt and the date of cancellation, among other things. If you received a Form 1099-C showing incorrect information, contact the creditor to make corrections. For example, if the creditor is continuing to try to collect the debt after sending you a Form 1099-C, the creditor may not have canceled the debt and, as a result, you may not have income from a canceled debt. You should verify with the creditor your specific situation. Your responsibility to report the taxable amount of canceled debt as income on your tax return for the year when the cancellation occurs doesn’t change whether or not you receive a correct Form 1099-C.”
So as you can see, the 1099-C form will give you additional information in box 6 that might help with the mystery. If the debt was settled, box 6 on your 1099-C should have an F in it.
In the past day, I’ve run into someone who reported a 1099-C on their tax report but did not realize they did not owe taxes on that debt because they were technically insolvent at the time of the debt forgiveness. In that case IRS Form 982 can prevent a tax liability. You might want to confirm you actually owed taxes on that 2018 return if you did not know about this form.
What concerns me most about your question is when you say, “I have no correspondence from the company relating to the settlement.” That tells me that all we have here are assumptions and not facts.
It would help if you had some facts, so you will have to contact the company and uncover the true status of your accounts. For example, do they actually show a balance due? And was the 1099-C triggered by a taxable event rather than forgiveness of the balance due.
That same attorney I quoted before also says, “if you’ve received a 1099-C and the creditor is still trying to collect, contact them to understand the situation. If the creditor is working under the old rule on a debt that’s 36 months old, you can request that they rescind the 1099-C. Otherwise, you may owe taxes on a balance that was never forgiven.”
If you don’t want to do this yourself, call my debt coach friend Damon Day who might help you through this situation and get some clarity.
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