The Thing Explained

Okay, so here's the deal.

If you are someone who has debts, I am sure you know they can, under certain circumstances, be canceled. It is a PROCESS to do this. It's never easy.  There is a lot of paperwork and worry and stress. In some cases, you even get investigated. I could have been paranoid about that unmarked vehicle driving by my house at the same time every couple of days, but you never know. Anyway, at some point, you are sent a letter telling you one of two things . . . either you debt has not been canceled and the hell of late fees and calls and all that will begin again. OR they will tell you the debt is cancelled and leave it at that.

You will be happy for a while, relieved that this isn't weighing you down anymore. That is, until the next tax season rolls around. In that case, if your cancelled debt is over six hundred dollars, you will get Form 1099-C that shows you the amount of the debt and tells you that it is considered taxable income.

And . . . you will just stare at this form, in shock and disbelief. Then, as it begins to sink in, you will be consumed with fear. This fear will depend a lot on the amount of money on which they are saying you are now responsible to pay taxes. If it is almost $80, 000, you will possibly consider suicide for the first time in a while. One way or the other, this horrible feeling will begin to take over your life. And it will become The Thing.

Or at least that is how it was for me. My student loans were canceled due to my disability. Cancelled, of course, because I had no way to pay them off. Logically it would follow that if I couldn't pay the debt, I wouldn't have the money for the taxes. I was baffled and angry and probably more scared than I have been in a long while.

I stayed scared for the weekend. I made some calls and found out nothing that helped me too much. 1099-C is a recent addition to the hellish things that can be sent to you and no one was that familiar with it. This scared me more, to be honest. For a whole weekend, I just sat there in fear. As you've read in some of my recent blogs, this caused so much stress that I wasn't eating well and I almost couldn't sleep. It was bad.

Once I calmed down, I started reading what I could about this situation. I knew educating myself was the only weapon I had. There had to be a way to handle it. Turns out, there were quite a few.

First of all, IF you get a cancellation of debt form, the first thing you need to find out is if the amount they are saying has been cancelled is really the amount you borrowed. See, if you borrow $10,000, the government sees that as income. They don't tax you on it, because they know you will be paying it back. If this debt is cancelled, they view it as income.

HOWEVER, they ONLY view the amount you borrowed as income. Not the late fees. Not the overcharges. And most of the time, not the interest, though you have to really check and see about that part. So even though you may have been forgiven for the loan and all its charges, not all of that counts as something that can be taxed. I did not borrow $80,000 to go to school. It was more like $30,000. However, fees and whatnot jacked it up. If you get a 1099-C, the first thing you need to question is the amount. And from now on, any time you borrow money, make sure you keep records of how much you actually borrowed.

The second thing you can do is file for the Insolvency Exclusion. If you were insolvent just prior to the debt being cancelled, then you may not have to pay all or any of it. See, the government actually realizes that if you are too broke to pay for something, there is a good possibility that you're too broke to pay taxes on that something as well.

It works like this. Let's say you have a debt on your credit card of $6000 and it gets cancelled. Normally, you would have to pay taxes on that. However, if you owe $20,000 to various entities ($10,000 in student loans, $4000 on your car, plus that $6000 credit card) and only have $8000 in assets, then you are insolvent by $12,000 (20,000 worth of dept -8000 worth of assets). You take the amount you are insolvent and subtract that from the taxable debt income. In this case, you would owe nothing.

Sound confusing? It isn't really, but when you're dealing with money, everything is confusing. When you're dealing with tax law, it's even more so. I read over this stuff again and again. I thought I knew what it was saying, but then I'd just get confused again. Probably because I was so nervous and it was unfamiliar territory.

There is a list of assets and debts that you have to count. The list of debts is pretty obvious and all the stuff you would consider. The list of assets might surprise you. You have to include anything you could reasonably sell. Jewelry, cars, houses, household items, books, hobby equipment, even your clothes.

I don't own much. Actually, in the process of this, I realized I own very little. My computer died a few years ago and I'm borrowing one from my roommate, so I don't even own that. I have my van, books, some clothes. I talked to a local car dealer about how much the van would have been worth at the time of the cancellation. I called the bank and got the exact amount of my savings account on the day prior to the cancellation. In other words, I had a good list of my assets for doing this insolvency.

On Thursday of last week, I took my tax mess to a CPA. It was an organized collection of papers, but it was emotionally a mess. She sat with me and plugged everything in, asking me all the questions I knew she would ask. When she was finished with the insolvency and considered that against standard deductions and everything, she told me what I had suspected to be true but feared was not. Due to my lack of funds, I owed nothing.

I still had her send it in though, because I wanted documentation of this.

She wanted to have it double checked because it was a pretty complicated deal so I had to wait until today to know for sure. I worried the whole weekend that something would go wrong. I tried so hard not to be hopeful about it, because I didn't want the crushing feeling of everything going wrong.

Today I stopped by there and signed my paperwork. Everything was still as it was on Thursday and I felt like I could breath for the first time in weeks. This tension I was holding in the back of my neck melted away. I could have cried. I may still cry, to be honest. This was so damned scary.

I'm still paranoid enough to worry that the Thing will cause me problems. I'm not that worried though. I didn't lie about anything or do anything wrong. I had everything checked by a professional and I sent all paperwork in way before the deadline.

And as I wrote in a post last week, the most important thing I did was not ignore this and hope that it would just go away. I tackled it. I handled it. I faced it. Somehow, I managed to deal with it without having a heart attack or some kind of nervous breakdown. I'm a little shocked about that last part, but I'm grateful for it, as I am grateful for all of how this turned out.