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Debt settlement may incur taxes

Many unaware IRS all-seeing via Form 1099-C

By Gloria Irwin
Knight Ridder News Service - April 9, 2005 - Cancer and lost income put Susan Snell in a $50,000 bind. So she was grateful when credit card companies agreed to settle some bills for less than the full amount. Until she found out that Uncle Sam was involved.

A few weeks ago, envelopes containing Form 1099-C began arriving at her Rittman, Ohio, home. She may owe income tax on the more than $10,000 the credit card companies had forgiven.

Like thousands of others, she was taken by surprise. Snell, a 64-year-old part-time hospital worker, had never heard of Form 1099-C.

It wasn't mentioned in the collection letters or phone calls from creditors. It wasn't mentioned, either, in the debt-settlement offers that creditors sent her.

All Snell heard were threats of legal action. She met with a bankruptcy attorney, but six months later, her bankruptcy paperwork still hadn't been completed, she said.

"I didn't know where to go from there," she said.

The calls kept coming. Last fall, she borrowed money from her retirement plan to pay partial settlements to five creditors.

More and more people are settling bills the same way.

Some credit-card companies have always offered settlements when it became clear the debtor either couldn't or wouldn't pay. Now an entire industry has sprung up promising to show consumers how to "settle bills for pennies on the dollar."

A growing number of Web sites and advertisements promote special programs and advice on settling debts.

Tax preparers and consumer advocates warn that debtors need to be aware of Form 1099-C before they jump at the bait.

"I feel really sorry for the people who get these things," said Saundra Weaver, of the H&R Block office in Green, Ohio.

Form 1099-C is issued by creditors to report canceled or discharged debt, money that the Internal Revenue Service considers to be taxable income to the borrower.

Sometimes the only mention of tax consequences in the various solicitations is in the fine print.

"The pattern that we're seeing is that a lot of these firms will put everything on the (settlement) contract," said Travis Plunkett, legislative director with the Consumer Federation of America in Washington, D.C. "Their sales pitch to consumers glosses over some of the negatives of debt settlement."

The sales pitches say it's better to settle than negotiate a repayment plan through a nonprofit agency like Consumer Credit Counseling Services because those plans typically take years to complete.

Mark Sweeney, a Munroe Falls, Ohio, attorney who represents debtors, said those who do settle a debt need to make sure that's accurately reflected on their credit report. Consumers should wait 30 days and then check their credit report, Sweeney said.

If you've settled a $5,000 debt for $2,000, the creditor may "continue to report that you still owe them $3,000," Sweeney said.

Plunkett said each debtor's situation is different. Some consumers might be better off filing for bankruptcy and getting a fresh start, he said.

Mary Gutierrez, a tax research specialist at H&R Block's headquarters in Kansas City, Mo., said debts discharged in a Chapter 7 liquidation bankruptcy aren't subject to Form 1099-C.

Any debt that is discharged under a Chapter 13 bankruptcy reorganization, though, may generate a Form 1099-C. "They may end up paying tax on it," Gutierrez said.

Gutierrez said, taxpayers who receive a 1099-C should not ignore them.

A company that issues a 1099-C also files a copy with the IRS.

NSW's debt collection improves despite technical glitches

By Gerard Noonan
March 18, 2005 - Despite a big improvement in collecting outstanding fines, the State Debt Recovery Office is still collecting under half of the $1.2 billion in unpaid traffic and "fail to vote" fines because of problems with data matching.

But the debt recovery office has refused a suggestion from the state's financial watchdog to write off historical fines, arguing that technological changes will allow it to catch forgetful miscreants over time.

A review of the agency's performance released yesterday by the NSW Auditor-General showed the debt recovery office raked in $553 million - 44 per cent - of the state's new and outstanding fines of $1.24 billion last year. This compared with three years ago when it struggled to collect 22 per cent of the $464 million in outstanding fines.

But difficulties in ensuring matches between names, addresses, date of birth and vehicle registration numbers means that more than half of outstanding fines still remain uncollected.

The office has sweeping powers to recover government debts referred by other agencies, such as the traffic infringement processing bureau, when they are unable to collect.

These include suspending driver's licences, cancelling car registrations, docking wages or retrieving outstanding fines from bank accounts and forcing offenders to court to face community service orders.

It can also put an order on a person's property, which is payable when the property is sold.

In the mid-1990s, debtors in NSW were able to be jailed but the law was changed in 1998 in the wake of the scandal where an 18-year-old man, Jamie Partlic, doing time for an unpaid fine, was beaten so severely that he was in a coma for several months.

In 2002, the debt recovery office launched a major campaign to net the backlog by issuing 200,000 notices.

At the time, the auditor-general estimated the outstanding amount at $460 million, although the office believed $334 million was unlikely to be recovered. In fact the campaign netted $48 million.

Since then it has slowly whittled down the list of outstanding fines, some more than seven years old.

The Auditor-General, Bob Sendt, yesterday praised the debt recovery office for its approach to the campaign which caused a public outcry at the time because a number of the notices contained errors.

"This is an example of the difficult and delicate challenges often faced in public administration," Mr Sendt said.

"The agency took the view that taxpayer funds were at risk and was prepared to endure negative publicity to achieve its strategic objective of recovering the backlog of revenue."