Posted on
November 16, 2009
at
3:41 am
hi, what does it mean for consumers when bad debts are written off--by the creditors? what does that even mean?
Posted on
November 16, 2009
at
3:45 am
Okay, bad debts are accounts receivable that will likely remain uncollected and will be written off by the creditors. Creditors usually do this 5-6 months after a consumer stops payments.
Posted on
November 16, 2009
at
3:51 am
Bad debts written offCreditors are obligated by the law to write bad debts off - it's a loss of profit for both of them - so what the creditors do is pass the accounts to collection agencies (which they might also own) in order to at least collect a portion of those debts.If it so happens that the collection agency was able to collect from the consumer - that means that the debt was forgiven or settled. The creditor would send the consumer Form 1099-C from the IRS so the consumer can report that incident.
Posted on
November 16, 2009
at
3:54 am
I see-- thank you, and what happens if the creditors fail to send that form to the debtor? And what happens if this debt forgiveness is not reported?
Posted on
November 16, 2009
at
3:58 am
Bad debts written off - what happens if the creditors fail to send that form to the debtor?The creditors would send the IRS that report for fear of penalties - you on the other hand, if you haven't listed that incident on your tax return and the creditor has, you could get a tax bill or, worse, an audit notice.
Posted on
November 16, 2009
at
4:06 am
What if for some reason I'm unable to report it? Is there an exemption?
Posted on
November 16, 2009
at
4:09 am
Bad debts written off - the IRS - exemptions-if you were insolvent before you even settled-if your debts were discharged because of bankruptcy
*insolvent means that your debts exceed the value of your assets
Posted on
November 16, 2009
at
4:10 am
Bad debts written off - can this be prevented?
Posted on
November 16, 2009
at
4:13 am
Bad debts written off - can this be prevented?Actually yes...if the consumer's debt amount is below $10,000 and the accounts are current, the interest rates are unmanageable, and the consumer thinks that at some point he/she would be unable to keep up -- he/she can enroll in a Debt Management Plan (credit counseling)That is, if his/her income is stead for the next 3-5 years...
Posted on
November 16, 2009
at
4:17 am
Just some additional reminder: If the consumer thinks that his/her debts exceed the value of the assets, IRS Form 982 should be included in the tax return.
