How to run the debt cancellation
What is cancellation of debt?
This means the creditor forgives some part of the debt without any consideration required in return. The cancelled sum is counted as the income for the debtor and will be taxable. The debtor gets the 1099-C form. In cases like some farm loans, insolvencies or bankruptcies, the debt might be forgiven without considering it as income.
8 steps for legal debt cancellation in USA
Most people resort to the debt cancellation when the other strategies like repayment plans or debt consolidation fail to work. This method is rather effective; however it implicates the huge damage on your credit history.
1 Get the copy of your credit report and the FICO score
FICO is the three digit number usually from 300 to 850, which represents your availability to pay the credit. If the score is reasonably high, creditors will most likely deny your debt cancellation since the score shows you’re paying well for your current accounts.
2 Find out your debt-to-income ratio
This number will later be used by lenders in order to determine the part of your income you’re giving off to pay the credit. If it’s at least 55%, they might consider cancelling your debt.
3 Negotiate with your creditor
Before trying to get your debt cancelled fully or partially, take your time to negotiate with your lender. You can do it yourself of resort to debt settlement company services. Be ready to provide your income documents.
4 Try to cancel your debts through the debt settlement procedure
This means you need to prove to creditors you’re ready to pay off the other part of the debt, the one they do not cancel. In case they agree, get the contract of your debt settlement in written form before starting to pay off the debt.
5The other way to get rid of your debts
You can do it by filing for Chapter 7 bankruptcy protection, though this is the last resort available in case the partial debt cancellation doesn’t work. These actions will automatically stop all the collector activities and will eliminate your debts. However the fact of bankruptcy will remain in your credit history for the next 7 years.
6 Define if your debt cancellation shall be reported
You shall only report about the cancellation of the credit given by the commercial lender. The private credits given by your parents of close friends are your family business.
7 The 1099-C Form
The lender will send you this form according to the law. There you can find all the information about the lender, the debtor and the cancelled sum. Transfer the stated sum to the line 21 of the 1040 Form stated as “other income” for the correct filing for your taxes.
Here (http://www.irs.gov/uac/Form-1099-C,-Cancellation-of-Debt) you can find all the needed information about the 1099-C Form, which is applied in case of cancelling $600 debt or more.
8 Check out the exceptions
There are cases when your cancelled debt will not be counted as income. This happens if it was partially cancelled throughmortgage restructuring or has any connection to the foreclosure or appears to be reduced on your principal residence. However the Mortgage Forgiveness Debt Relief Act of 2007 (MFDRA) only works for the debts up to $2 million being cancelled from 2007 to 2012. If you file for bankruptcy, there’s no need to list the cancelled sun in your 1040 Form. In other cases the cancelled amount will be defined as income.