I never saw JP Morgan Chase making THIS move. If you’ve got any old credit card debt with Chase Bank, chances are you received an interesting letter or two this week. Chase mailed letters to hundreds of thousands of consumers, with some great news: the superbank “will no longer attempt to collect the unpaid debt on your account.”
Before you break out the champagne, the letter continues by saying “you will receive a Form 1099-C from us in the near future.” For the unfamiliar, a 1099-C is a Cancellation of Debt Form. Translation: the unpaid balance will be reported to the IRS. If a debt is canceled or forgiven, the cancelled amount gets included in your gross income. You may have to pay tax on the income – unless you qualify for an exclusion or exemption.
What does Chase mean by “in the near future”? In time to be reported on your 2013 tax return, to be exact. And then the letter finishes up with the very ominous “We will continue to provide account information to Experian, Equifax, and Transunion.”
So what kind of news is this exactly? Why has JP Morgan Chase suddenly decided to cancel or forgive millions of dollars of consumer debt? Is Jamie Dixon feeling generous in the wake of his $20 million raise? (I’ve got a few theories based on my earlier article this month.)
More importantly, what does this mean for you? Will this debt forever haunt you on your credit report? Can Chase sell your account to a collector who will hound you to repay this debt years from now? Will you have to pay tax on this phantom income?
Let’s start with the scariest questions first and work our way backward.
Do you have to repay a debt that has been cancelled and converted into income for IRS purposes? Some folks find it hard to wrap their head around how debt can suddenly become income. Consider it this way. If you earn $1,000 and you buy yourself a new washer and dryer, that’s considered income you spent.
Now consider this: you buy yourself a new washer and dryer and charge the cost on a credit card. You never pay the bill for whatever reason. The creditor tells you they forgive you and your debt is cancelled. Therefore, it’s as if the creditor gave you $1,000 in income.
Creditors love to tell you you’re still liable for the cancelled debt. Even some of my fellow consumer financial advocates appear to think that cancelled or forgiven debts can still be collected. The truth is, once the debt is cancelled and considered income, it can’t be considered debt anymore. You can’t be forced to pay taxes on forgiven debt that is now considered income AND still be responsible for repaying the debt later.
That doesn’t stop creditors from selling your former debt to debt collectors, however. And these debt collectors will try to convince you that they CAN still legally collect on the debt. But they fail to tell you one tiny important fact: not a single court has ruled that the debt is both cancelled and still due.
If you do get a 1099-C and a collector comes calling, don’t believe everything you’re told. In fact, I’d recommend not believing anything you are told by a collector.
The only way a creditor can “un-ring the cancellation bell” is if they issue a 1099-C and then say “oops, we made a mistake” and correct the “error” by sending you an amended 1099-C. But first they have to prove they truly never intended to give up their right to cancel the debt.
According to tax experts, most authentic “mistakenly” issued 1099-C forms are caught a few weeks or months after they’re issued – not years later. And 1099-C forms that are sent out “mistakenly” usually happen in bulk.
Here’s a riddle for you. Are these letters and any subsequent 1099-C forms issued by Chase being issued “by mistake” or is this Chase’s way of getting a tax write off to offset the billions of dollars in fines they’ve doled for previous collection and banking violations?
If Jamie Dixon tries to claim JPMorgan Chase “mistakenly” sent this letter and 1099-C Forms out to EVERY person with a delinquent account, I can see the writing on the wall now. Class action lawsuits, state and federal prosecution and another smack down by the Consumer Federal Protection Bureau are likely to occur.
Now might be a great time to write Jamie Dixon a thank you letter and let him know Chase Bank has 30 days to tell you in writing the cancellation was a mistake or you’re going to consider the debt truly forgiven and no longer owed to them.
All joking aside, if the creditor didn’t actually cancel the debt, it’s up to the creditor and the collector to correct the mistake. Make sure they tell you exactly what that mistake was, in writing. Also, make sure they issue you an amended 1099-C BEFORE you pay the collector or the creditor anything additional. And if you receive an amended 1099-C more than 3 years since you paid taxes on the income, you can’t amend your tax return. In this case, run, do not walk, to the nearest tax attorney to find out your rights before you pay the collector a single thin dime.
If the IRS comes looking for you because the creditor has sent them a 1099-C but didn’t send one to you, was your debt actually cancelled? Unless the creditor issues you an amended 1099-C saying the form was issued by mistake, there is no valid legal way for the collection agency or the creditor to pursue you for repayment of the debt. Let the IRS know the creditor didn’t send you a copy of the 1099-C, and amend your taxes as needed.
Creditors must mail Form 1099-C to you by January 31. If you don’t get it, there’s a good chance that they didn’t actually mail a 1099-C to the IRS. Which means you still owe the debt. Probably better to wait to see if the debt was truly cancelled than pay taxes you don’t actually owe AND still owe the debt.
Do you owe taxes just because you “earned” the income reported on the 1099-C form?
Tax professionals have tossed around statistics showing roughly half of all people who receive a 1099-C for cancelled credit card debt may not even owe tax on that income. You may qualify for a reduction or exclusion of the tax depending on your deductions and tax credits as well your net worth (if your liabilities are greater than the sum of your assets).
Here’s what this looks like (in sorta plain English). If the amount you’re “insolvent” (liabilities exceeding assets) is greater than the amount listed in the 1099-C, the cancelled debt amount isn’t taxable.
If you’re only “slightly insolvent,” then a portion of the forgiven amount still might not be taxable income. If your brain went “huh?” read on. If your 1099-C says $5,000 worth of debt was cancelled, and your net worth is -$2,000, then you would only be liable for paying taxes on the remaining $3,000, not the full $5,000.
Another way you might not have to pay taxes on the income: if the charges were used for home improvements on your primary residence. If you can prove it, you may be able to reduce the amount of taxes you owe by claiming a mortgage-related debt forgiveness exemption.
Check out IRS Form 982 to determine if you might qualify for an exemption or reduction of taxes on the income that’s claimed. If you like doing your own taxes, some great videos are on youtube.com that can help you with the Form 982. The best one by the National Taxpayer Advocate Office: http://www.youtube.com/watch?v=qdpwtaSGpfQ.
The good news here is that even if you do owe taxes in the cancelled debt, the amount you’re being taxed on the forgiven debt is probably far less than the amount the creditor would have been willing to settle for as payment in full for the debt.
If you do your own taxes, and you receive a 1099-C for cancelled credit card debt, be sure to download and read the IRS Publication 4681. It contains excellent examples to demonstrate how to record your exceptions and exclusions so you minimize your taxes on the cancelled debt.
If you’re not interested in a DIY route, I highly recommend contacting a seasoned tax attorney to help you fill out Form 982. They know all the ins and outs, and can minimize your tax liability.
Errors on 1099-C forms abound, so if you think the amount the creditor has listed is wrong, immediately contact the creditor or debt collector and request a corrected 1099-C. Make your request in writing, and send it to the creditor/collector via certified mail so you have a receipt that it was sent and received.
When it come to being a member of the “Creditor Fight Club,” it’s important to remember these four rules:
Rule number 1: If you get a 1099-C form, don’t ignore it.
Rule number 2: Immediately get a copy of Form 982 from www.irs.gov or talk to a tax professional and calculate whether or not you’ll owe taxes on the amount cancelled.
Rule number 3: Update your credit reports so the debts are listed as “cancelled,” with a zero balance.
Rule number 4: If a collector comes calling, deal with them in writing.