Debt Settlement, Insolvency, & Income Taxes

In November 27, 2009

In January and February of every new year, I get numerous emails from people who have settled unsecured debts during the prior calendar year. They are surprised to find 1099-C forms in their mailboxes, which report to the IRS the forgiven debt balances as ordinary income. Many consumers are totally shocked to find they might owe taxes on cancelled debt balances. “How can I owe tax on a debt?” they want to know. “Can this be true? Is there anything I can do about it?” I figured I would write about this subject now, so I can point to this post when the email queries start hitting in January.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

At first glance, it really doesn’t make much sense. How can a debt be treated as income? The logic is that the consumer enjoyed the goods and services purchased on credit. So when the lender has to record a loss on part of the balance, the IRS takes the position that this is equivalent to income to the consumer. You got a bunch of stuff, essentially for free, goes the argument, so therefore you need to pay taxes on that “gift.”

Under the current IRS code, that’s just the way it is, and there’s little point in wishing it were otherwise. Fortunately, there is a loophole provided by the IRS in the form of the insolvency exclusion. “Insolvent” means the same thing as negative net worth, where you owe more in debts than you own in the value of your assets. If you are insolvent at the time you reach a settlement with a creditor, then you can offset the 1099-C income up to the total amount by which you were insolvent.

Here’s an example to make it more clear. Let’s say you settled $50,000 of debt during 2009, and you paid an average of 50 cents on the dollar, resulting in a savings of $25,000. Will you have to pay taxes on the savings of $25,000? That depends on your net worth situation. Let’s assume that your home equity was flat or upside down (very common nowadays), so you don’t have any positive asset in the form of home equity. To keep it simple, we’ll ignore personal effects and automobiles. Your assets at time of settlement were limited to $20,000 in a 401k account (yes, retirement funds count in the asset column), plus $1,000 in checking, for a total of $21,000. You had $50,000 in unsecured debt. Therefore your net worth was negative $29,000 ($21,000 of assets, less $50,000 of debt).

Come January, you receive 1099-C forms from the creditors you settled with, and the total of those forms adds to $25,000 – the amount of debt that was forgiven. Since you are “insolvent” by $29,000, you can exclude the full $25,000 saved during the negotiation. In this situation, no extra tax liability would result from the 1099-Cs issued for the settlements, and the insolvency exemption has come to the rescue.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

What would happen if you did have home equity? Let’s say that you had $30,000 of home equity based on the fair market value of your property, and all the other figures quoted above also held true. In that situation, your net worth would be positive. The $30,000 of equity added to the $21,000 of 401k and cash yields total assets of $51,000, against $50,000 of debt, for a positive net worth of $1,000. Under these circumstances, you would be liable for taxes on the full $25,000 of 1099-C income associated with the canceled debts. 🙁

It’s also possible that you might overlap these two scenarios, where you get to exclude some of the 1099-C income but not all of it. For example, let’s adjust the equity value in the above scenario from $30,000 down to $10,000, giving you $10k equity + $21k other assets, for a total asset value of $31k. Against $50k of debts, this results in a negative net worth of $19,000. Yet with $25,000 of debt forgiven, only $19k of this figure could be excluded, and the remaining $6,000 would have to be treated as ordinary income.

The above seems pretty simple when laid out like this, but for some reason, this entire discussion on insolvency still seems to throw many people a curveball. I see a lot of confusion on how to calculate net worth, and one of the biggest misunderstandings pertains to income. Sometimes people ask, “I’m working and my job is stable, so how can I declare insolvency?” Income has nothing to do with your net worth, so let’s at least try to clear up this key point. Income & expenses are one accounting category, while assets & liabilities (debts) are another category. It’s possible to be insolvent while you still make a six-figure income! Income is not an asset, until it becomes excess cash in your bank account, after expenses. So just because you have a job with a steady paycheck, that does not block you from claiming the insolvency exemption via Form 982. You can still owe more in debt than you own in assets even if you are working steadily.

Another stumbling block is when to perform the net-worth calculation. Technically, the IRS says you must calculate net worth at the time of settlement. OK, but what is the time of settlement? Is it the date the creditor verbally agrees to settle? Or is it the date their accounting department actually makes the ledger entry to write off the forgiven part of balance – and how could we ever know that date anyway? Pending any possible adjustments or improvements to the clarity of the IRS language on this subject, my standing advice to clients is that they should perform one net worth calculation for each settlement. For “time of settlement,” we use the date the settlement payment is due rather than the date of the agreement letter itself. If the settlement is a multi-payment arrangement, then we take the date of the final payment as the date of settlement. In the absence of any clear directive on this point from the IRS, the above would seem to be the most logical interpretation.

I strongly urge consumers to get professional help to assist with the tax issues associated with settlement, but I wanted to at least get across the fundamentals. Mainly, consumers really need to understand that the insolvency exemption is available, especially since debt collectors often try to talk people out of settlements by scaring them on the tax issue. In my experience, the majority of people pursuing debt settlement are insolvent and do qualify for the exemption. However, I also feel that it would be very foolish to reject the debt settlement strategy just because it might result in a tax bill. After all, the total of the settlement payout + taxes would still be well under the full balance on the account, resulting in an overall net savings. And even when taxes are “part of the lunch,” settlement still yields a vastly better outcome than the “forever plan” (i.e., endless minimum payments) offered by your friendly credit card bank!

Don’t let the 1099-C tax issue scare you away from debt settlement. Just be sure to follow the rules and document everything correctly. Settle your debts, claim insolvency if you are entitled to, and pay your taxes if you aren’t! Whether or not you owe taxes on your settlements, you’ll still be vastly better off without the debts on your back.

UPDATE February 29, 2012:

Consumers are now receiving 1099-Cs from creditors for debts that are several years old, in some cases decades old. In response to new rules by the IRS, companies are sending out these forms, and consumers are seeing little guidance from the IRS on dealing with this confusing situation. If you have received a 1099-C on an old debt obligation, here is a link to an excellent article by Gerri Detweiler, who has thoroughly researched this issue.

[UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]



  1. M Krisman says:

    Geat info!! I have read through the IRS pubs on debt cancellation as well as other web searches (especially the insolvency info); yours was the best! I have been looking for the answers to two questions: Is the FMV of your residence what it actually sold for (if not how do I find this out)and on the IRS Insolvency Worksheet, below “Assets”, on line #19 it requests “Residences…” is this where I put the FMV of the residence?

    Thanks for your help.

    M. Krisman

  2. Charles says:

    M., the Fair Market Value (FMV) of a property is the value it would sell for under current market conditions, and not necessarily what it *has* been sold for previously. Generally, the FMV for a piece of real estate is determined by having an appraisal on the property, or lacking that, “comps” produced by a local realtor. As to the specific instructions on filling out IRS forms, I cannot advise you on this, sorry. Please consult a tax professional.

  3. nathan says:

    What if the Creditor does not issue you a 1099-C or you never get one due to change of address. Should you still report the approximate amount of canceled debt.

  4. Charles says:

    Nathan, that is really two different situations. If you have moved and may simply have missed one coming in the mail, then you should get in touch with the creditor and request that a duplicate copy be sent to your current address. If they fail to issue one at all, that is a different story. You can hardly report the amount of the canceled debt if the creditor does not inform you of the exact sum that was forgiven! I would still, in this situation, follow up with the creditor though and see why they have not issued one, etc.

  5. Eric says:

    This issue is tricky to figure at first, but the IRS themselves makes form 982 real simple to fill out and as charles said “majority of people pursuing debt settlement are insolvent and do qualify for the exemption.”

    Fill out for 982, send it in, and don’t think twice.

  6. BillR says:

    Charles- What is the reason you recommend a “tax professional” to assist at tax time? Is the form that difficult to understand?

  7. Charles says:

    Bill, it’s for the same reason I don’t provide legal advice. I’m not an attorney, nor am I a trained tax preparer, etc. Form 982 is not difficult to understand at all, but in some situations it can get tricky when Part II (Reduction of Tax Attributes)comes into play. So I simply feel more comfortable pointing folks (who are confused by the tax issues associated with settlement) to professional help.

  8. Dee says:

    Regarding FMV of home when preparing insolvency worksheet. With real estate being such as volatile state now its hard to pin down FMV from one month to another. My neighbor sold his place, which was in the same shape and type as mine for only 45,000 last year, which I thought was a fair price considering how much work it needed, but my value still says 131,000 on zillow, and my place needs the same amount of work as his did. How can I get a FMV number that is realistic in this market?

  9. Charles says:

    Dee, just get in touch with a local realtor and ask for a set of “comps” on properties similar to yours that have recently sold in your area. That will provide a more accurate set of figures than what’s available from Zillow, etc.

  10. Albert says:

    In paragraph 6 you state “Home Equity”. Is the FMV itself considered home equity? I mean, if I owe more than the house is worth, how can I have equity?

  11. Charles says:

    Albert, fair market value (FMV) is what you could sell the property for in today’s real estate market. If you owe on the mortgage an amount that exceeds the FMV, then you do not have any equity. Equity is always the difference between FMV and loan balance remaining. If that is a negative number, you are “upside down” and have no equity.

  12. Albert says:

    So, Do I need to list the Fair Market Value on line 19 of the Insolvency Worksheet included with in the IRS Publication 4681? I did have an upside down mortgage at the time the debt was cancelled. I owed 331,000 in principal, the house sold short for 230,000. I have received a 1099-c with a cancellation of debt in the amount of 190,000.

  13. Charles says:

    Albert, call the IRS help line, please. I can’t answer that type of question for you via a blog.

  14. Cheryl says:


    I settled a debt today and am doing a list of assets and liabilities. I don’t have the exact figures yet but have prepared a draft. My question is under credit card debt (liabilities) do I add the loan amount just settled or any additional debt that I have. I would really appreciate your helping me. Thanks.

  15. Charles says:

    Cheryl, net worth is calculated by taking the fair market value of your assets, minus the total of your liabilities (debts). Do the calculation as though you had *not* yet settled that account. So it’s total assets (including the on-hand cash to be used to pay the settlement), less total debts just prior to the settlement. If the difference is negative, you have a negative net worth and are insolvent.

  16. James says:

    Hello Charles, first time poster here. I was wondering whether this insolvency loop hole for the IRS is also used for State taxes? I live in CA and our state tax is around 11% a year, so if I can skip the Fed tax, do I still get hit with the CA state tax, or does the insolvency also used for not having to pay CA state taxes? Thanks!

  17. Charles says:

    James, I’m not a tax pro, so don’t take my comment here as definite. Check with the Franchise Tax Board for CA to be sure. However, my understanding is that the insolvency calculation affects your Adjusted Gross Income (AGI), and the AGI then transfers onto your CA return. I’m not aware of any modifications to the CA return that require you to add back 1099-C income that has been excluded (based on insolvency) on your Federal return. So I’m pretty sure that it takes care of itself via the AGI.

  18. Angela says:

    Have a question…I spoke directly to an IRS agent and they told me that I do NOT need to send in proof of insolvency with form 982 BUT a lot of tax advice websites (including turbo tax) tell me that I DO need to send in the proof with form 982. Do you have a clear answer regarding this? From your kit that I purchased, it states to have the records handy in case IRS requests them but I want to be sure. I am 100% insolvent so I want to be sure that I have all my ducks in a row. Thank you.

  19. Luie says:

    I foreclosed on a property in CA in 2009. I completed form 982 for my Fed return and checked box 1e – discharge of of qualified principal residence indebtedness. For my CA state return, I want to file form 982 with the insolvency exemption since at this point the state is in limbo about continuing to mirror the fed exemption law. Is it okay to do this? Thank you.

  20. Charles says:

    Luie, please direct your question to the Franchise Tax Board in Sacramento, CA.

  21. Jennifer says:

    I am seriously considering filing for debt settlement, but the taxation scares me. I obviously don’t have the money to pay taxes on this. My fiancé is out of work, doesn’t quailify for unemployment, has medical issues tha are preventing him from working and has a seresis of medical bills mounting. I can handle paying for all this debt and a wedding at the same time. I’m assuming I would be insolvent, but I want to figure it all out before I Agee to it. When listing all you liabilites and assests what can be included as a assest other than your home and 401k or in my case 403b? Also, can you list student loan debt as a liability?

  22. Charles says:

    Jennifer, I understand the concern, but your position really makes little mathematical sense. If you need relief on the debts due to serious financial problems in your life, then how does it make sense to stay on the “forever” plan with the banks? The total you will pay over time is far greater than the sum of a settlement (based on a reduction of the balance by 50% or more) + taxes on the forgiven part (if you are solvent and don’t qualify for the exemption).

    Anyway, to your question, assets are anything you own that has value, so homes, property (land), automobiles, and retirement accounts form the main parts of that category. Liabilities are any debt outstanding, *including student loans*, car loans, mortgages, credit cards, etc. Add what you “own” in assets, subtract what you “owe” in debts, and if the difference is negative, you’re insolvent and would be entitled to exclude 1099-C amounts up to that negative value.

  23. Kevin says:

    Charles, thank you for the clear and easy to understand information on this site. I too am in a
    1099-C situation. In calculating liabilities, should negative equity in a closely-held C corp be

  24. Charles says:

    Kevin, good question. I’m not sure on this answer, but by definition, one of the reasons to establish a C-Corp is to insulate your personal finances from corporate finances. You could, therefore, file a corporate bankruptcy without involving personal finances (personally guaranteed business loans aside). So I’m fairly certain that you cannot include negative equity within a C-Corp in a calculation for personal net worth. But I’m not a CPA, so I strongly recommend that you do further research, consult with a CPA or tax person, etc. Also, you might even get through to somebody at the IRS if you call next week. 🙂

  25. lori says:

    Okay, for some reason, even after reading this, I am still having problems. My total debt, including what I owe on my mortgage is $123,881. The online apprasials for my house list it at approximately $176,000. I owe $88,500 on my home. When I try to figure out if I am insolvent or not, do I include the whole value of my house as an asset or only the equity that I have in my house? If I have to add the whole $176,000 into the picture, then obviously I would be solvent. Thanks.

  26. Charles says:

    Lori, yes, you take the full value of the property (what you could sell it for), less the amount owed. The difference is your equity. So you have at least $176k assets, less $124k debts (including mortgage). Your net worth is therefore $52k, so you would definitely be considered solvent.

  27. Frank says:

    Charles, thanks for the extremely informative write-up! My question is this — in determining insolvency, do I include my spouses assets? We have a mortgage with no equity currently in our home. My name is on the deed (as tenancy by entirety). We live in Virginia.


  28. Charles says:

    Frank, check with the IRS, but I believe it depends on whether you file jointly or separately. If jointly, then you’d include her assets; separately, you should be able to split 50-50 on assets/liabilities. But if the home has no equity, it probably won’t affect the calculation much either way.

  29. Sean says:

    Since we need to claim 401k’s as an asset do we include the FULL amount of the 401k or only the amount that we would get in cash after the withdrawal? For instance, I called my 401k company and they told me even though I had 40,000 I would only be able to withdraw $25,000 and that it would be taxed at 10% thus I would get a check for $22,500. Is that the amount I place on the insolvency worksheet or the $40,000?

    This answer doesn’t exist on the Internet and my CPA isn’t 100% sure.


  30. Charles says:

    Sean, my understanding is that you are supposed to include the *gross* amount of a retirement account as the asset amount, not the net figure after taxes. It’s really no different than counting a home at the fair market price, even though you would net less after paying a realtor commission, etc.

  31. Al says:

    This is very helpful, thank you! In a nutshell, the amount of my insolvency at the time of cancellation of credit card debt is more than the amount of the canceled debt, so I checked box 1b of Form 982 and entered the appropriate amount on line 2. However Part II baffles me since the only “assets” I had at the time of cancellation was basically the furniture in my apartment and the money in the bank – I still carried a balance on my car loan. What should I do here? THANKS!

  32. Charles says:

    Al, my understanding is that Part II does not usually apply to most debtors. It pertains to “tax attributes” that must be reduced by the 1099-C amount, etc. If you don’t know what tax attributes are, you probably don’t have any. 🙂

  33. Richard says:

    Ok I have read the comment on 401k above but I am still not clear. Am I supposed to include what is in total of my 401k account or the interest on it? If it is the interest how is that computed?

  34. Laura says:

    Thank you for the info. My husband and I both recieved 1099C’s for 2010 cancelled credit card debt. The first one (earliest date) is in my name. When I do the insolvency worksheet do I include just myself? If so, do I include the full value of our house, bank account, etc.

    On the date of the settlement we show a larger than normal amount in our bank account becauses we took a loan from my husbands 401k to help pay for the settlements. But, I cannot claim the loan as a liability for myself because it is not in my name, but the checking acount is in both of our names.

    Since we are filing jointly, should I just do one insolvency worksheet that covers both of us for each settlement date?

  35. Al says:

    Thanks Charles! I was hoping you would say that…

  36. Charles says:

    Richard, you just include the total balance in the 401(k) account, inclusive of whatever interest had been credited to the account as of that date. Future interest need not be considered.

  37. Charles says:

    Laura, if you are filing jointly, then my understanding is that you should just do one net worth calculation for the household, combining asset and debt balances. That way there should be no issue showing the 401k loan as a liability to offset the on-hand cash balance at time of settlement.

  38. cris says:

    In the liabilities section of the Insolvency Worksheet, can you include a car lease (not for business purposes)?

  39. Debbie says:

    I have a comment on questions 30 and 32 on the worksheet; if you have to declare full balance of a 401k why does the form state “interest in retirment fund” Does line 32 mean i must enter my 529k’s

    • Charles says:

      Debbie, “interest in retirement fund” does not refer to the amount of interest accrued within the retirement account, but rather to your overall involvement or “financial interest” in the account, meaning the total balance. (As usual, the IRS language is confusing.) Yes, line 32 refers to any and all education-type IRA or retirement accounts.

  40. Katherine Roberson says:

    “Interest in a pension plan”

    My husband has been receiving an annuity retirement check for about
    20 years …how would we know the value of this …we do not get statements. Since it is set up to
    pass on to me if he dies…How would you ever know the (total balance) financial interest”/value of his annuity/pension plan?

    What about Social Security??

    • Charles says:

      Katherine, my understanding is that an annuity that has been “annuitized” (converted into a permanent stream of income), is no longer treated as an asset, but rather a source of income. Similarly, Social Security is income, not an asset. Check with your CPA, but I do believe you can exclude both the annuity income and the SSN or pension income from any net worth calculation.

  41. Nina says:

    I do need to file for my 1099 C and the date of the settlements ( I have 3 ) all diffrent from the date of the debt cancelations. So at the time of settle my debt is way different than at the date banks printed on the 1099 C forms. So should I put my assets for the date of settlement or the made up date they put on the 1099 C. I do have settlement offers as a proof but I am not sure which one IRS will care for.
    and an other question in case of auditing can I use my credit reports as a proof of debts, since I dont have my credit card bills they were forwarded to the settlement company and they say they dont have them.

    • Charles says:

      Nina, my interpretation of “time of settlement” is either the date of the settlement letter itself, or the date of your final payment on the settlement. If you take your asset values with this approach, the values for main assets like real estate should not be too far off what they would be otherwise, if you were using the 1099-C date. Also, my understanding is that none of this information appears on the single Form 982 that must be submitted. The insovlency worksheet only gets submitted later if they request it. For proof of debts, a credit report should be ok, although it may not be totally accurate on the balances.

  42. Valerie says:

    Can you explain what they mean on the insolvency form where it states to list as an asset any “interest” in a pension, i do have a pension plan through my employer but am no where near retirement and can not touch any money in the account, I don’t even know how much is in the account. Also life insurance cash value is this for term life ins. also or whole life only?

    • Charles says:

      Valerie, please scroll up a few comments and you will see a discussion on the meaning of “interest in pension plan.” Term life insurance (by definition) has no cash value, so is not considered an asset. Only the cash surrender value of a whole life policy or other “permanent” insurance plan would be considered an asset.

  43. Eric says:

    How do you calculate the “interest in a pension plan” for the insolvency form. I am no where near retirement. So to clarify, is my pension plan income not an asset?

    • Charles says:

      Eric, it depends on the type of plan you’re referring to. Please scroll up a few comments to see the discussion on this subject. Check with the IRS help line, but my understanding is that only retirement accounts that you are vested in would count as an asset.

  44. Liz says:

    Hi Charles. I have a 1099-C and want to make sure I understand everything thus far. My husband has a house, vehicles, a savings account and other assets in his name only (and no debt) while I am, and was at the time of settlement, insolvent. It is my understanding that if we file jointly, his assets will count and if we file separately I can claim insolvency. Is this a correct assumption?

  45. Liz says:

    Thank you so much. This site has been a great help.

  46. Amber says:

    We had credit card debt settled in 2009 and were insolvent (by almost $60K mainly due to student loans). We filed Form 982 as required but now the IRS is telling us to send them our “list” of assets vs. liabilities. I find this odd, but am doing it. My question is though, do I really need to include things like jewelry and furniture as personal property? And what about a leased vehicle? How is that treated? Thank you.

  47. Amber says:

    Thank you Charles, that was helpful. I didn’t read anything regarding leased vehicles though. Someone told me that I wouldn’t include a leased vehicle under assets (because I don’t own it) but that I should include the amount owed (the payments) on it under liabilities… does that sound correct? None of this really matters simply because our student loans alone make us insolvent, but I still have to document everything on the worksheet regardless. Thanks again.

    • Charles says:

      Amber, my understanding is that you don’t need to include a leased vehicle. It’s not something you “own,” and it’s not really a debt either. Since you are insolvent anyway, it’s really a moot point in your case.

  48. Camille says:

    Mr. Charles, Just found this site. Very interesting – thanks for helping folks. My questions: Is our attempting to get debt settled on a 2nd Mortgage. They are offering a 75% drop off of the principal…New to this – is that about normal, competitive? Also, do most people who get debt settlements end up having it show on their credit as “settled for less than full amount” or do the creditors ever assist by notating, the balance as “paid in FULL”? If they marked it paid in FULL, would that not generate this 1099-C form then? Lastly, when folks end up being considered “solvent” and do owe to the IRS, and the amount forgiven is over $75k or so, do you know about how much $$ folks end up having to pay to the IRS? Even an average number? Is this then paid when you normally file your taxes in April or so. I know I had a few questions……Camille

    • Charles says:

      Second mortgage settlements of 10-15% are common, so 25% is nothing to celebrate. Settlements are reported as “settled for less than full balance,” or similar entry. Paid in full means paid in full, not a settlement! You’ll get the 1099-C form for any forgiven amount exceeding $600 regardless of how it’s worded on your credit report. For principal residences, there is relief on the tax liability through a temporary measure expiring in 2012. Solvent debtors who receive 1099-C forms, and where no exemption applies, pay taxes at whatever the ordinary income rate would be for their tax bracket.

  49. Amber says:

    Thanks again Charles. Do you happen to know if the amounts listed need to be exact? Also, do my husband and I need to each make our own separate worksheets are just one combined? (We each had cards settled in our separate names but file our taxes jointly.) I’ve consulted several tax professional and have gotten varied answers… insolvency seems to be a hazy area.

    • Charles says:

      Amber, a joint filing would be a single net-worth worksheet since the 1099-C income is being applied to the joint return. Amounts should be as exact as you can make them. 🙂

  50. Denise says:

    Greetings Charles, thanks for your helpful blog!
    I am a Real Estate Broker 34+ years, and have an accounting degree too, yet find this challenging as I have not worked in accounting. I would like to point out something on home values..I asked my CPA..and she said I should list my homes value as net of selling expenses, reducing the value by those costs to get to true FMV to myself as a seller, which could be as much as apx 10% below the so called comp or appraisal. Your thoughts on this? Thanks!

    • Charles says:

      Denise, this does make sense but I have not seen anything in the IRS code that pertains to it. IRS Pub. 4681 does not seem to address this factor. So I would keep accurate notes as to any assumptions you make about such costs. You need to be able to support it if you are audited.

  51. Denise says:

    thanks Charles. If a credit card charges off a they always issue a 1099 at year end? I am told some of the banks just charge off cards with balances below 10k, without turning them over to collection.

    • Charles says:

      Creditors are required by IRS code to issue 1099-C forms for any forgiven debt in the amount of $600 or greater. Charge-off, “turning over to collections,” and issuance of a 1099-C are three different things, so you’re mixing up your terms here. If you are thinking the debts might just “go away” after charge-off, don’t take that approach. It’s very rare for that to happen, and third-party collection agency or debt purchaser activity are expected.

  52. bobby says:

    my mom loaned me $200k 5 years ago, the proceeds of which i loaned to a business. that business just went backrupt (they never repaid me) and i can’t repay my mom. she doesn’t want to gift me the $200k, so her cpa is going to issue me a 1099c. my net worth is around $100k. i estimate the income taxes on the $200k cancelled debt to be approx $100k. when calculating my solvency, is it $100k (today’s net worth) or is it zero ($100k net worth less the approx $100k of taxes due on the $200k cancelled debt)


    • Charles says:

      Bobby, check with a CPA, but my understanding is that you would calculate the net worth *at time of settlement*, meaning just before the deal was agreed upon. So you take full face value of the debts against any assets you own. Two minutes prior to settling, you owed $200k on a personal note, and you say you have $100k in assets otherwise. So it looks to me like you are insolvent to the tune of $100k. If all $200k of the note gets canceled, then you could offset $100k and only have to pay taxes on $100k of the canceled debt, not the whole $200k.

  53. Mike says:

    Charles, if your 401k or traditional IRAs are keeping you from being insolvent, would it make sense to withdraw funds before the debt cancellation? You would pay the same tax you pay for having debt cancellation income (plus 10% penalty), but then you could stick it into a Roth.

    This seems better than paying tax on the 401k pre-tax value for debt-cancellation then paying tax again when you withdraw it.


    • Charles says:

      Mike, I agree with you in principle. It’s all about the math, so if you are borderline for insolvency to the point where an IRA withdrawal, net of taxes, would shift the figures to an insolvency status, then it would make sense to take the hit early. However, I do want to inject a note of caution — you can only offset forgiven income up to the amount by which you are insolvent.

  54. Shie says:

    Charles, thanks for this post. Very informative. Our situation is like this. Hubby was deployed(and I moved back to CA) when the 1099c was sent to us, so, unfortunately, we were’nt able to get the CP2000 notice and we were’nt issued a form 1099c by the bank, as well. Just 3 days ago, we recieved a CP501 notice from the IRS informing us of the assessed tax liability($1,006). I called up the IRS and asked help in filing out form 982 but is still trying to figure out the figures to put in to the insolvency worksheet. I made a draft of what we own and owed that time and found out the we are on borderline to be able to exclude the whole forgiven amount($4,500 debt discharged; insolvent for $5,000). We used the best estimate that we could possibly use in arriving at the fmv of everything we own, like furniture and fixtures. My biggest concern is that I have no supporting documents to back up the amounts(FMV of assets & Liabilities) I put in in the insolvency worksheet. Is this something that I should be worried about(in case of an audit)?

    • Charles says:

      Shie, my understanding is that significant assets like homes or vehicles should be based on documented sources (like for real estate, or for car values). With simple personal possessions, it’s obviously a much more subjective proposition to determine “fair market value.” One approach would be to use values consistent with what the items would be worth if you were to donate them to a charitable organization. You can probably hunt up guides online or even software that will help with this part of it.

  55. bailey says:

    charles– first off, my husband & i file a joint tax return & the only bill we have that is joint is our mortgage and our power bill. we both have a number of credit cards, but none of them are joint accounts, but i am authorized buyer on one of his, and he is authorized on one of mine. i have an ira in only my name. we have several joint bank accounts, and i have one with my name only, which is dedicated ssdi benefits.
    earlier this year i settled 2 of my cc accounts, and am now settling more of my cc accounts, and most of his cc accounts as well. i was just recently approved for ssdi, and received my backpay for 30 months, and that is what i am using to settle the accounts with. now for my questions.
    my questions: 1. since we file a joint tax refund, upon filling out an insolvency worksheet (that i keep for our records) for each settlement, since they are not joint accounts being settled, do i include the total value of all our assets and liabilites ? or do i figure only the part (& half on joint bills)belonging to the one that the settled debt belongs to?
    2. in re of cash in bank, since we are using my ssdi back pay to settle the debts do i have list it under “cash and bank acct balances”, since ssdi is somewhat protected ? 3. say i have the settlement payment scheduled to come out of a bank account on the 31st of the month via automatic draft, but it does not show as deducted from my account until the 2nd, which day do i use to figure “immediately prior” to COD? thanks-

    • Charles says:

      Bailey, check with the IRS help line, but my understanding is that when you file jointly the insolvency worksheet is based on combined assets and liabilities. Any cash on-hand is part of your asset list, regardless of source. The net worth calculation has nothing to do with whether or not the funds are protected from creditor lawsuits/judgments. You can use the payment date (e.g., 31st) itself for the snapshot, since your asset values won’t change significantly in a few days.

  56. Bailey says:

    thanks charles… i forgot to ask one thing… if you pay the settlement over 3 months, liabilities credit card total- just before you pay it off, do you include the total amount of the settlement, or just the part that was left to be paid in the final payment in the total cc debt? thanks

    • Charles says:

      Bailey, for the first settlement, take the total face value of all debt, as well as all assets (including what you will pay on the first settlement). This is your net worth just before the first settlement. Repeat for each subsequent settlement, reducing the debt by the ones previously settled, and netting out any cash already spent on prior settlements, etc.

  57. Chris says:

    Charles, your blog is GREAT! I am insolvent and understand that I need to fill out form 982 (lines 1b and 2). But, I am still confused, after reading all of your great and informative posts, as to what I fill out in part 2. Is it line 10a? What amount do I use? The same amount as entered in line #2?

    • Charles says:

      Chris, you don’t need to put anything down in Part II unless it applies to you. It’s quite rare to see this section of Form 982 come into play at all. It deals with fairly obscure situations that simply do not apply to most people. For example, if you have property you are depreciating annually, then you need to adjust the taxable basis for that property if you are claiming the exemption for 1099-Cs. Business credit carryovers also must be adjusted, etc. So these items do not apply to the normal personal tax return. When that’s the case, only Part I of the form has to be completed.

  58. Alice says:

    What would happen if I had two houses foreclosed on. What would be the asset and debt? Would they be staggered in terms of “at the time of settlement”? In other words, house 1 is foreclosed on. Two weeks later, house 2 foreclosed on. Do I combine t
    the two assest and debts before and after the foreclosure. Thanks in advance!

    • Charles says:

      Alice, a foreclosure will not necessarily generate a 1099-C. It depends on how the creditor handles the transaction. If you do wind up with 1099-C forms for both mortgages, then first check to see if you qualify for the Mortgage Debt Forgiveness Act before you use the insolvency exemption. (The act applies only to principal residences and to “purchase money” loans.) Otherwise, you would do two calculations, the first including both properties, the second only excluding the figures associated with resolution of the first property.

  59. kathy says:

    Hi, I lost my home in a flood. At the time my mortgage was 65,500.00 balance owed and the bank took a short sale on the home and sold for 17,000.00. I will be getting a 1099 for the balance. If I do the insolvency worksheet, do I put the 65,500.00 as debt amount, then put the 17,000.00 for what the house is worth or do I put $0 for what the house is worth as a asset? Any help in this matter to clarify would be greatly appreciated.

    • Charles says:

      Kathy, sorry to hear about your flood loss. The insolvency calculation can be viewed as a snapshot of your net worth situation just immediately prior to the settlement agreement taking place. So you take the full balance of debts owed against the *fair market value* of any assets. In other words, you would include the $65,500 as a debt owed, and the asset value would be $17,000 since that is what the house was worth on the market. You would then be insolvent by $48,500 for this asset. You also have to figure in any other assets and debts to arrive at an overall calculation of net worth.

  60. kathy says:

    Thank you for clarifying that for me.

  61. Joan Miller says:

    Hi Charles – Thanks for all the good advice. I am still not totally clear on this “interest in pension” part. I have received a monthly pension from a state teacher’s retirement account for 10 years. From what I read I assume that this would be considered income rather than an asset. If it is an asset, however, is it just the amount I receive in a year or do I need to calculate what I would receive in the future.

    • Charles says:

      Joan, this subject is confusing at best. My understanding is that “interest in a pension” means the calculated present value of your future stream of payment income, thereby converting the pension income to an asset for purposes of figuring net worth (solvency or insolvency). But Pub. 4681 on Canceled Debts does not provide any set means for making this calculation. I suggest you call the IRS help desk and see if they can point to a publication that provides instructions on how to figure this.

  62. Eli says:

    My wife & I owned a home with first mortgage=$110K, HELOC=$460K. A shortsale of $325K paid off the first mortgage and about $200K went to HELOC. We received 1099-C ($260K)from HELOC but was in my wife’s name & SS# ONLY (not joint).

    Our assets are limited to a my IRA =$300K, and my wife’s IRA=$100K. No other joint assets.

    If we file joint, both IRA accounts will make us solvent.

    Since the 1099-c is in my wife’s name only, if we file separate then she is insolvent.

    Does the insolvency test apply to her only because she received the 1099-C, or to both of us because the debt was in both names? thanks

    • Charles says:

      Eli, I’m not sure on this point, sorry. Please check the IRS help line and see what they say about it. Then call back again a day later and see if they give you the same answer! You may get different answers from different reps. My take is that you should be able to file separately and use the insolvency exemption under your wife’s return. But it’s a bit odd to begin with that the 1099-C was only in her name, since you were both account holders.

  63. Barbara says:

    I have a 1009C from the US Dept. of Education for student loan cancellation due to disability. I am filling out form 982 for insolvency and I understand Part I but I don’t know if I need to put the amount of the debt cancelled anywhere in Part II?

    • Charles says:

      Barbara, most debtors do not have to complete Part II of the form. Unless you have one of the situations listed in Part II (also see the instruction page), then it doesn’t apply to you.

  64. Dee says:

    I received a 1099c for a student loan I co-signed for with my son. He received one as well. He received the funds, do we both have to claim this as income?

    • Charles says:

      Dee, as far as I know, it should be one or the other. The same canceled debt should not have to be counted as income on your return and also your son’s return. It would appear that one of the 1099-Cs was issued in error by the lender. But I am not exactly sure what would be the best way to handle this situation, so I recommend you contact the IRS help line for input.

  65. DONNA says:

    Charles, this is a great blog thanks for helping all of us in trouble with this massive problem. My question: I was forclosed on with two houses in California. One I lived in and one my son lived in , now my 1099 I had to treat my sons house as a rental. Because of my 401K it does not look like I will be able to file insolvancy. I don’t understand how this has to be listed but then it doesn’t count. Can you please explain. If it were not for that I would be insolvant I think. This is so confusing.

    • Charles says:

      Donna, I’m not quite sure I understand your question. The 401(k) is counted like any other asset that you own, and becomes part of the net worth calculation for determining insolvency. So it’s not correct to say that a 401(k) is “listed but then it doesn’t count.” Now, that said, be sure that you are correctly calculating net worth. I’m assuming that any 1099-C associated with the property you lived in is already exempt under the Mortgage Debt Forgiveness Act, so it must be the rental property that is causing the problem. For that property, take the full value of what you owed on the mortgage(s) before losing the home to foreclosure, and then subtract the fair market value of the property at that time. If the property was upside down by more than you own in assets (including retirement funds), then you are insolvent to that extent.

  66. hassan says:

    Quick questions. Is a lean on a house considered a debt and does that change the FMV? Also, do you send the IRS documentation of the FMV of the house of the year they are questioning?

    • Charles says:

      Hassan, my understanding is that any lien would still be considered as a debt and would therefore reduce the FMV of the home. You send Form 982 only, but should be prepared to provide documentation proving how you arrived at the FMV for the property, in case the IRS requests it from you.

  67. greg says:

    I think I know the answer to this, but would like your take.

    Most of the scenarios I’ve seen are with cancelled credit card debt and the like. My canceled debt is a HELOC.

    I have cancelled debt for this HELOC of $25,600.

    My indebtedness at the time of the debt cancellation was the same amount. So isn’t that amount included in liabilities? In my case, it seems to wash.

    My other assets and liabilities may or may not qualify me as insolvent, but for the purpose of asset/liability vs. debt at time of debt cancellation, it seems I can count this debt as a liability.


    • Charles says:

      Greg, yes, the cancelled HELOC amount of $25,600 would be included in liabilities at the time the debt was forgiven. But I don’t see it as a “wash,” simply because there probably was no collateral asset (i.e., equity) against the HELOC, or it wouldn’t have been cancelled in the first place. The bottom line is that the forgiven HELOC amount represents negative net worth of at least that figure at the time it was canceled.

  68. luci says:

    im trying to determine if am insolvent. regarding my debt at time of debt forgiveness; there are multiple collection agencies attempting to collect from me for the same account. Do I consider all collections agencies as debt or just one? Based on what i have researched they may all be able to collect from me..unsure

    • Charles says:

      Luci, multiple collection agencies should not be trying to collect on the exact same debt at the same time. It’s common for an account to be assigned by a creditor to one agency for a few months, and then shifted to a different agency, and so on. Anyway, if it’s just one debt account, then you should use the value for that debt and not treat it as several debts for purposes of calculating insolvency.

  69. Violetta says:

    Thanks for all the info. Great blog.
    I received three 1099-Cs for credit card debt. All were settled within 2-3 months apart. Do I have to prepare a separate worksheet for each? I just need to file one 982 right? Just to confirm that the worksheets are for my records only correct? I will only be sending form 982 with my tax return?
    Also, how would it work with states? Does that form need to be attached to a state return as well. Is it taxable on the state return. I’m in NY

    • Charles says:

      Violetta, yes, you prepare a separate worksheet for each settlement, since your net worth will vary between settlements. You keep the worksheets for your records and submit a single Form 982. I cannot answer your question on state taxes. Please consult with your state’s tax authority.

  70. David says:


    I received 3 – 1099-Cs. I was expecting two but not the third. It’s my understanding that if a credit card company sells the debt to a collection agency, and I settle that debt with the collection agency a 1099-C should not be distributed. Is that correct? Or not?

    • Charles says:

      David, you are incorrect. When a debt is canceled and the amount forgiven is $600 or greater, the creditor must issue a 1099-C per IRS regulations. This holds whether or not it’s the original creditor or a purchaser who has taken over the account.

  71. greg says:

    Clarification question:

    My original question was posted here:
    Posted February 23, 2012 at 11:48 am
    Your reply here: Posted February 23, 2012 at 4:03 pm

    I see what you mean. The heloc was not an asset, only a liability.

  72. Susan says:

    Charles, I sold primary residence as a short sale (forgiveness amt 123,000)and we still own other property (rental) and spouse has 2 retirement accts 1 that he can draw from in an emergency one untouchable (do we count both ret accts?) and if my total assets at time of forgiveness were 600,000 including everything and total liabilities was 623,000. Am I insolvent by enough with 23,000. Or do I need to be insolvent by the $123,000 on the 1099C. Thanks

    • Charles says:

      Susan, all retirement accounts (accessible or not) are supposed to be included in the net worth calculation. The amount you are insolvent by works as an “offset,” so in your example, you would only be able to claim the insolvency exemption for $23k of the $123k forgiven, meaning there would be taxes on the difference of $100k. However, you also indicate this was a primary residence. If the loan on which some of the balance was canceled was a “purchase money” loan (i.e., one taken out at time of purchase of the property and not subsequently refinanced or modified), then you may still qualify for an exemption under the Mortgage Debt Forgiveness Act.

  73. Greg says:

    I have debt cancellation this year, for which I received a 1099. I’ve done the insolvency worksheet and on the date of the forgiveness, I was insolvent. Sometime I miss the obvious but I just don’t see where on the 1040 I put the insolvency amount. Or do I just attach the 1099 and the Insolvency worksheet to my 1040? What am I missing?

  74. Greg says:

    Form 982 question. I have a cancelled heloc, and was insolvent at the time. I filled out the insolvency worksheet and went to form 982. I checked box 1b and filled in the insolvency amount on line 2.

    I can’t figure out which item in Part II to check. None of the options, 4-13, seem to apply.

    Now, once I have the right box checked, does the insolvency amount go on my 1040 anywhere? Or do I just attach the entire form 982 and insolvency worksheet to my return?

    • Charles says:

      Greg, you just include Form 982 when you are claiming the insolvency exemption. There’s no place on Form 1040 to include the insolvency figure, and you are excluding the 1099 income by declaring the exemption, so there’s also no income to be shown on the 1040. As far as I know, the worksheet for insolvency is for your records, in case the IRS asks for it. Otherwise, you just include Form 982 attached to your return and that’s it. Part II of Form 982 usually does not apply to most people.

  75. greg says:

    Thank you so much! That makes a lot of sense.

    I now have another 1099-C on a house that went into foreclosure. Long story, but after divorce (both of us on mortgage), spouse refused to pay and I couldn’t pay it as well as my own living expenses. The date of foreclosure is the same as the date of cancellation on the heloc debt (heloc was colateralized by mortgaged property). Do I need a separate Insolvency Worksheet for each, or can I combine them into one?

    • Charles says:

      Greg, here is where it can get tricky. The way it usually works is that you calculate net worth just prior to a first settlement taking place, so you’re capturing the full face value of the debt (as part of the net worth calculation) you’re about to settle. Then for a second settlement, the figures would usually be adjusted to remove both the liability from the first settled account, as well as the cash asset used for that settlement, resulting in a different net worth calculation (i.e., less insolvent since one debt is gone). Your situation is unusual if both settlement dates are the same. I’d run the calculations separately and keep two worksheets, but you should probably call the IRS help line for confirmation on this point.

  76. Steve says:

    Charles – great information! How is child and/or spousal support treated as far as debts are concerned? I have an order that quantifies the exact amount that is to be paid monthly so it sounds like an expense but I view it as a debt with a balance to be paid (not unlike a credit card balance). My rental agreement is the same thing. I have a contractual obligation regardless of whether I live in the house or not. Thoughts?

    • Charles says:

      Steve, sorry to disappoint you, but my understanding is that child/spousal support would be treated as an expense rather than a debt. Ditto for the rental agreement. Otherwise, people would claim a full year’s rental lease as a debt, when it’s really a monthly expense. However, I’m not a CPA myself, so you may want to confirm with the IRS help line. I’m pretty sure they will say neither of these can be treated as debts, and they are not referenced in the insolvency discussion in Publication 4681.

  77. Eileen Alexander says:

    In May of 2011 my husband and i got received a loan modification and our first loan.We originally owed &359,041.81. leaving a balance owed of 190k on the ist. and $60k on the secondOnce our assets are listed what percentage of taxes will we owe IRs

    • Charles says:

      Eileen, there is no way anyone could determine what percentage you will owe just based on the information you’ve provided here. You don’t even indicate whether you have received a 1099-A or 1099-C form associated with forgiven debt. Please try to state your situation more clearly, thanks.

  78. helen says:

    Thank you so very much. This blog has been far more informative than anything I’ve read in the IRS Pub 4681 or the Instructions for Form 982.

  79. Ann says:

    What if I have debts at the time of “settlement” that were previously “charged off” or sold to other “collection agencies” a year or more prior to my settlement date. Obviously I still owe these debts as I can still be sued for them but they are not active accounts anymore. I was told these could no longer be included as “liabilities” based on their new status when I do a calculation of assets vs. liabilities to determine my degree of insolvency. Is this true?? It will make a big difference in whether I am entirely 100% insolvent on a debt I am considering settlement on or only partially insolvent meaning I will owe money. These are debts outside the one I am considering settling. Seems quite unfair that the IRS would not consider these liabilities since I could still be sued for them & they were never settled previously. Yet who knows, we all know the tax laws are written to benefit the tax man as much as possible. Thanks in advance for any clarification you can offer.

    • Charles says:

      Ann, a charge-off by itself does not relieve you of the debt obligation. My understanding is that any unresolved debt (whether or not it has been charged off already, sold, etc.) is still a liability that you owe. It is certainly the case that any prospective lender would count such unresolved debts as part of your debt-to-income ratio, so I don’t see any reason why they should be excluded from an insolvency calculation. Whoever gave you that information seems to have been making the false assumption that debts expire (in terms of your liability) at time of charge-off. If that were true, collection agencies and debt purchasers would not exist!

  80. Phyllis says:

    I have 61000 dollars discharged student loans due to permanent disability. I didn’t have special underserved area type of forgiveness of loans. I am in discharge status on loans. Now, in doing 2011 taxes MY ONE QUESTION IS can I do the insolvency form 982???, as my assets only equal about 1800 dollars including car etc. I am barely above the poverty level with SSDI income. If I just file, I will have to pay nearly 16000 dollars based on the discharged loans. Will insolvency form exclude the discharged amount on my gross income? MY LAST QUESTION IS Does this insolvency automatically work for state gross income as well???

    • Charles says:

      Phyllis, Form 982 is used to claim insolvency when you have had “income” from canceled debts reported via Form 1099-C. Also, insolvency has nothing to do with your income, but rather your net worth as determined by assets minus debts. If you had $1,800 in assets and $61,000 in debts at the time the debt was forgiven, then you would be insolvent by $59,200. If you have received a 1099-C for discharge of $61,000, then $59,200 of that would be offset by insolvency and you would only pay taxes on the remainder of $1,800. Every state has its own particular tax rules, so I cannot answer your question about state-specific taxes. Given your situation, I recommend you get confirmation on how to handle this. Since you are on such a limited income, first try calling the IRS help desk for free assistance, and you should also be able to speak with someone in your state’s tax office.

  81. Randy says:

    I received a 1099 c for my 2009 tax year. I was told I could not claim insovlency at that time because of my CALPERS pension. I filed bankruptcy in 2010 to include the cancellation of debt taxes of $28,000 to IRS and $14,000 to California State. The Bankruptcy was not accepted by either. I filed an amended 2009 tax excluding my public pension and it was accepted by the State but not the IRS. The IRS audited me and concluded I was solvent based on my public retirement. I see a lot of answers regarding 401K’s and private retirement funds but no Public retirements. I can not access my retirement until I retire or separation. Once I retire, it becomes my income. Can anyone answer the basic question Is a Public Retirement System considered an Asset or can it be excluded? Thanks. By the way I am filing a protest and requesting an appeal on the Audit and if that does not work I plan on going to tax court. Any help would be appreciated.

    • Charles says:

      Randy, my understanding is that the IRS language for calculating insolvency requires inclusion of *any* pension as an asset. There are tables used by the IRS to convert the future value of pension income to an asset in terms of present value. You need to get help from a CPA or an Enrolled Agent with this issue.

  82. AMANDA says:

    Im trying to fill out the insolvency worksheet. looking under liabilities(debts)number 3-car an other loans. i would write in the 14,000 that i had left to pay on my car. correct?
    BUT then under Assets- number 18 says cars an other vehicles. Would i put the value of my car or leave it empty because i dont owe it yet?(still have loan on car)

    • Charles says:

      Amanda, yes, you show the $14,000 owing on the auto loan in the liability section. In the asset section, you’ll list the fair market value of the car, since it could be sold for that amount. You can look up current values at Kelley Blue Book (

  83. Suzanne says:

    Charles–very informative site! I have question. I am unable to file for insolvency and have settled debt and know the amounts that my 1099c’s will be. How do I calculate what % I may owe on this debt settlement?

    • Charles says:

      Suzanne, if you cannot claim insolvency, then the income reported on the 1099-Cs will be treated as ordinary income. So your tax rate will be based on whatever your current tax bracket is, unless the additional 1099-C income shifts you into a higher bracket.

  84. Rick says:

    Can you file insolvent two years in a row?

  85. felix says:

    In Shepherd v. Commissioner, the tax court stated “We find that the portion of Mr. Shepher’s pension that could have been withdrawn as a loan from PERS is an asset for purpose of insolvency under section 108d3.” If a retirement fund only allows a max 30% loan against its members’ contributions, should only 30% of the pension fund be reported as asset in the insolvency worksheet?

    • Charles says:

      Felix, IRS Pub. 4681 on insolvency calculations includes language about “interest in a pension,” which has been generally interpreted to mean that the present value of a future pension must be calculated and included as part of net worth. I don’t know if there are specific exceptions for retirement plans such as PERS, although your case finding would appear to support that conclusion. You should check this important point with a CPA or tax professional.

  86. Barbara says:

    I received a 1099c after I had filed a return and recieved a refund. I was insolvent and want to file form 982. However, when I prepared my amended return and included the amount listed on the 1099C, I now owe the IRS $600? Do I just file form 982 with my amended return?

    • Charles says:

      Barbara, yes, if you are eligible to claim insolvency, then you should be able to include Form 982 with your amended return, so the exemption will offset the additional income from the 1099-C.

  87. Tony says:


    I was only Joint on a HELOC loan approx $66,000. I was not on the 1st mortgage my X-wife was and she was also on the HELOC Jointly with me. The proceeds of the HELOC were distributed to HER to Save her from Foreclosure. After this point, the property securing the HELOC foreclosed without my knowledge. WAMU at the time of the foreclosure indicated the HELOC was closed at this point. However, it wasn’t actually closed and they kept the account open since they ran my Credit and saw that I had no lates on the HELOC account. They then sent a letter to me after foreclosure that the account would now be charged off. (However, they didn’t bother to deal with my X-WIFE since she had NOTHING and just foreclosed.) It is a Joint account. Hence WAMU then Charged OFF the Debt 15 months later without any deficiencies on the account. This is 15 months after they Indicated they were to Charge it off the date of the Foreclosure. Collection Agency then tried to ONLY come after me (Not my Xwife, since WAMU excluded her from the Charge OFf given they already foreclosed on her and deemed me the responsible one. Now with the Back Ground out of the way here is My question: Chase has acquired this HELOC debt and never tried to COLLECT from me. With the Mortgage Settlement ACT they sent me a Letter explaning they will be Cancelling my Debt and will report it to the IRS. As per IRS 1099c Instruction Joint Owners of a Loan are to be 1099c’d after 1994 if amount s over 10,000 – the IRS Law department told me the same. Given, CHASE doesn’t care about my X-Wife since they base there letter on what they acquired from WAMU, they intend to Solely send me the 1099c. This is bad since, it was her principle residence not mine so it is excluded from Mortgage Forgiveness Act. Calling CHASE doesn’t help in this case since they claim from a COLLECTION Stand point they can careless about the X-WIFE and it is this department that generates the 1099c. I may be insolvent, but when do I claim insolvency here? The date I receive the 1099c, The date they charged it off which was July 2009? Or do I complain to the IRS that the 1099c is supposed to be JOINT and open an investigation from the IRS to CHASE over this matter given CHASE doesn’t care about the WAMU situation and misreporting they performed? Since it is a HELOC do you know what CHASE will enter on the 1099c on the FMV Line 7? My point is, she (X-wife)received the money as Income and is joint on the Loan – she is responsible to report it and I may file a letter with a 982 indicating that I am not claiming it but the X-WIFE is. I know I can do that if she is listed on the 1099c but Her name will not be. The only people that have my lon on file is the CHARGEOFF department in an entirely different system and no one will validate my HELOC as joint at CHASE.

    What would one do here? This is a Unique circumstance and to be honest, your site is the only site I have found after Years of Frustration that perhaps can help guide me in this case.

    Thank you,


    • Charles says:

      Tony, your situation is indeed unique and quite complicated, so I’m reluctant to say “do this,” or “don’t do that.” I think you would be wise to consult with a CPA who is thoroughly knowledgeable in this area of tax law. My own opinion is that the Mortgage Forgiveness Debt Relief Act would not have applied anyway, since HELOCs are generally excluded from consideration under that law, as they are not purchase money loans that qualify under the Act. You would therefore have to rely on the standard insolvency exemption that you are already exploring. Insolvency is supposed to be calculated as of the date on which the creditor canceled the balance in question, so it will depend on what date they show on the 1099-C in Box 1 on the form. I don’t know what Chase will enter for FMV in Box 7. What I suggest is that you wait to see what the 1099-C specifically states before taking any formal action. You should receive it by 1/31/2013, and then you will be able to calculate insolvency and determine whether or not you even need to dispute the fact that they didn’t issue it as a joint 1099-C. If you will end up owing taxes as a result of the way Chase has handled this, *then* a dispute would be relevant and appropriate.

  88. Felix says:

    My home foreclosed in Oct 2011, sold by lender in Dec 2011 for 320k (per Zillow/trulia).I received 1099A for 1st loan and 1099C for HELOC. How do I reflect these items in the tax returns?
    (1) 1040 schedule D – 1099A issued on Oct 2011 for 250k, FMV of property 400k, not personally liable for debt.
    (2) Form 982 – 1099C issue on Dec 2011 for $100k, no FMV stated, personally liable for debt, insolvent for 130k (assets less liabilities).
    I appreciate your help. Thanks.

    • Charles says:

      Felix, confirm with a CPA, but if this was your primary home (not a rental or income property) then you may qualify for a tax exemption under the Mortgage Forgiveness Debt Relief Act, which is valid through 12/31/2012. Form 982 covers this under line 1e and the amount of canceled qualified principal residence debt goes on line 2.

  89. Felix says:

    Out of the $100 HELOC, $40k was spent on home improvement? How do I show this on the return?
    Thanks a lot.

    • Charles says:

      Felix, if you were insolvent by $130k when the $100k HELOC was canceled, then this also is covered by Form 982. See IRS Pub. 4681 for detailed examples and instructions.

  90. Johnny C says:

    Hello, I talked to an IRS agent on the phone, told him I file joint with wife and she received the 1099C, and he still said my 401k does not count as an asset for my wife’s insolvency worksheet, unless I am listed on the 1099C.
    Was he wrong? Has anybody out there checked into this? Including my retirement account on the sheet would make a big difference for us.

    • Charles says:

      Johnny C, I’m certainly not going to disagree with information provided directly by an IRS agent. It does make sense that only her net worth would come into play for the insolvency calculation, since the debt was only in her name. Obviously, if you had also been listed on the 1099-C, then you would need to include the 401k asset value.

  91. Rick says:

    If you currently owe unpaid taxes for a prior tax year does this exclude you from claiming insolvency, for example, as some form of penalty. I did not see anything on the IRS website for this proposition, and in the fact the worksheet on the IRS website for insolvency “liabilities” includes a section to include unpaid taxes.

    • Charles says:

      Rick, you should check in IRS Pub. 4681, but I’m not aware of any restriction on being able to claim insolvency while owing unpaid taxes. As you pointed out, unpaid taxes can be included in the insolvency calculation itself.

  92. EB says:

    My wife owed approximately $25,000 in unsecured debt(credit cards) when we married, and was in default on all of it. Alone, she is clearly insolvent. If she settles the debts, will my assets be considered in determining her insolvency exemption, even though we were not married at the time of incurring the aforementioned debts?

    • Charles says:

      EB, you should verify this with the IRS help line, but my understanding is that your assets would only be included in the calculation if the 1099-C was issued in both names. Since the debts were solely in her name, you should be able to use just her asset figures for the insolvency worksheet.

  93. Joanna says:

    I have a few questions regarding debt settlement. If I paid half of a agreed debt settlement on November 16, 2012 and agreed to pay the remaining half on January 5th 2013. When would I expect to receive the 1099-c on the forgiven portion in Jan 2012 or Jan 2013? 2nd question when would I calculate insolvency right before I made the first payment or when I make the last payment? And lastly I heard that Life insurance is also calculated as an asset in the insolvency is this correct?

    • Charles says:

      Joanna, it’s normally the case that a creditor will not formally cancel the forgiven portion of the balance until you first pay your side of the settlement. So in your example, you’d expect the 1099-C to arrive in January 2014 for the 2013 tax year, since you won’t complete the settlement until January of 2013. IRS Pub. 4681 indicates insolvency should be calculated “immediately before the cancellation” takes place. This is usually interpreted to mean that insolvency should be calculated just prior to the date the creditor agreed to settle, so that the worksheet includes the full value of the debt in question, as well as assets to be used in the settlement. (You should confirm this with the IRS help line.) Term life insurance is not included, but cash-value insurance would count as an asset to the extent of the surrender value of the policy at time of settlement.

  94. EB says:

    Assuming I can reach an agreement with either the original creditor or someone who purchased the debt, and make the agreed payment, how does this affect my credit report and/or credit score? Is my credit rating improved at all by paying the agreed amount, being substantially less than the defaulted amount?

    • Charles says:

      EB, it depends on where things stand now with your credit report, but usually a newly reported settlement will not immediately improve the credit score. It will, however, improve your debt-to-income ratio, since unresolved charge-offs are still counted by lenders as debts you owe. Generally speaking though, the purpose of settling debts is to take care of the obligation itself and the risk associated with default, rather than an immediate boost in credit score.

  95. David F. Scarelli says:

    We have a promissary note on a debt by an individual dated 1992 for $6,ooo with 10% inerest compounded anually. The note has reached between $70 and 80,000. He has no intention of paying any settlement we have offered. Hr now lives in Talahasee, Florida. We can’t afford the cost of persuing it legally. We hope that we can forgive the note so that least he would be held for the income tax that would be owed to the I.R.S. What for 1099 should we send him. Will he be required to pay any amount on the note?

    • Charles says:

      David, it sounds like you’re well past the Statute of Limitations for bringing legal action on this defaulted note, but you may want to consider at least talking with a collection attorney before just giving up. Most collection agencies/attorneys work on a contingency basis, so the cost may not be what you were thinking. Anyway, if you formally forgive the note balance then you should be able to send the debtor a 1099-C for the amount written off. He will have to pay taxes on it unless he can show insolvency (see IRS Pub. 4681 for details on insolvency). There should also be instructions for how to issue a 1099-C available at

  96. Lonnie says:

    Helped daughter buy house 10 yrs ago with $130,000 cash put my name on mortgage and title,put down another
    $80,000 cash 5 yrs ago for newer home (210k) total .We short sold house this Sept and I was sent 1099-s form for $179,000 I’m foreclosing on my house this mo Bought it for 400k owe 340k . I have 85k in 401k account 10k savings, I owe 18k student loan 28k on auto loan.I also receive a pension of $1500 a mo and a anuity of $950 a mo.Looks like I can’t claim insolvency. What can I do,it seems so wrong for me to get taxed on money I alrady paid taxes on and just wanted to help my daughter get into a home.

    • Charles says:

      Lonnie, I cannot determine solvency/insolvency just based on these figures. For one thing, your pension and annuity income have nothing to do with it, so ignore that part. Just based on $85k retirement + $10k cash less $18k student loan, that would be $77k net. But with the car, you have to offset the $28k loan by the current market value for the vehicle, so that will probably lower the net positive. Also, if you sold short, then clearly the property was underwater at the time, greatly adding to the negative side of the calculation. Take the sale price against the full note balances before sale to determine the negative associated with this property, and see if that puts you “in the hole” overall in terms of insolvency. Also, insolvency is not an “all or nothing” proposition. Let’s say the calculation shows that you were $100k insolvent — then the taxes would be on the $79k difference only, not the whole $179k. With the amount of tax liability at stake here, I recommend you go get some help from a qualified CPA.

  97. Patricia says:

    I have been researching, and it seems pointless to include my retirement account as an asset when I can not withdraw from it. I read the above link on a case where the court states “Mr. Shepherd had the right to immediately
    withdraw some portion of his accumulated contributions as a loan from his pension
    with PERS immediately before petitioners’ discharge of indebtedness. We find that
    the portion of Mr. Shepherd’s pension that could have been withdrawn as a loan
    from PERS is an asset for purposes of insolvency under section 108(d)(3).
    Petitioners did not provide any evidence of Mr. Shepherd’s accumulated
    contributions to the pension immediately before the discharge. Therefore, we are
    unable to determine what portion of Mr. Shepherd’s pension could have been
    withdrawn as a loan. Accordingly, we find that petitioners have not met their
    burden of proving the fair market value of the portion of Mr. Shepherd’s pension
    that constitutes an asset.”

    I am I correct in listing only the amount of retirement that can be with drawn, instead of the full amount?

    • Charles says:

      Patricia, I am not a CPA or Enrolled Agent. You should present this question to a tax professional for clarification, but my understanding is that the full balance of a retirement account like a 401k or IRA must be treated as an asset for the purpose of calculating insolvency. I would not rely on this particular case unless your pension is specifically with PERS as was Mr. Shepherd’s. A pension is a future stream of income, so in this case the IRS interpretation of “interest in a pension” was evidently limited to the amount that could be borrowed at that time. It would not be handled the same way if the retirement fund in question was in a 401k or IRA, etc.

  98. Gina says:

    My 1099C is the result of a ELOC on a second home that was foreclosed. Can I still do the insolvency? Would original amount of the forgiven debt be included in the AGI?

    • Charles says:

      Gina, yes, you can still use the insolvency exemption if your net worth was negative at the time the balance was forgiven. See IRS Publication 4681 for details on how to calculate insolvency. If you are eligible for the exemption, then you declare it on Form 982 to offset the “income” from the 1099-C that gets reported on your 1040.

  99. joseph says:

    Can I include legal fees owed to an attorney as a liability for insolvency? How about a personal loan from a friend (which was used to settle)?

    • Charles says:

      Joseph, please refer to IRS Publication 4681 for instructions on what can or cannot be included for the insolvency calculation. My understanding is that debts that are documented can be included. Personal debts to friends or family members would have to be documented via a promissory note to withstand an audit. I believe a legal bill can be included, but you should verify this with the IRS help desk if it’s not made clear in the publication.

  100. Katie says:

    Hi Charles,
    Thank you for your informative articles! I recently settled my OUTRAGEOUS student loan debt and am worried about going to just any tax professional because it seems like no one knows about Form 982 and student loans. Your article cleared some things up for me but the thing I can not figure out is how much I will be insolvent by with ZERO assets? I took out a student loan in 2004 for 37K and by 2009 it had grown to 120K (fees charges and interest). There was no way for me to make the 1000 a month they asked for and would not consolidate or take what I sent them. Once I got my feet on the ground I settled with Sallie Mae for the amount borrowed! But now I might be looking at a 20k tax bill for the debt accrued in interest. I have no assets and about 15K in debt (but I am making progress! -considering just a couple years ago I was 145k in debt) Do you have a suggestion for me to at least send my tax agent in the right direction? Any help would be BEYOND appreciated. Thank you.

    • Charles says:

      Katie, you’re right. Many tax people and even some CPAs are not very well versed on the 1099-C insolvency issue. You are actually fine here. See page 4 of IRS Publication 4681 for the definition of insolvency. “Do not include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.” This means that when you calculate insolvency, you include in the liability column the full face value of the debt just before it was forgiven, including whatever it had inflated to with interest and fees. So if the Sallie Mae loans had inflated to $120k as per their billing statements, and you otherwise had zero assets at that time, you were insolvent by $120,000 (plus whatever else you owed at that time on other debts). Since the forgiven balance is less than $120k, you should be able to claim insolvency for the entire amount shown on the 1099-C. Voila. No tax bill. 🙂

  101. Mattie says:

    To figure insolvency on a 1099C
    I was told that everything you own needs to be counted in your assets.

    Clothing,( which would include even underwear) jewelry,(which would include costume/junk), computers, cell phones, land line phones, business equipment and tools, and furniture, in addition to any money or investments.
    (And maybe even your electric toothbrush)

    Is this correct? I have found no where that gives specifics on this.

    • Charles says:

      Mattie, see IRS Publication 4681 for detailed instructions on what must be included in the asset calculation. The Worksheet for calculating insolvency asks for a valuation on household goods, with jewelry a separate category. These are supposed to be listed at the “fair market value” for these items, not what you paid for them originally.

  102. Connie says:

    Great info but I’m still confused… I just received cancellation of debt for $6,589.46. I will need to pay taxes on that and do they take it out of your refund? I think it’s great, I just never heard of this before.

    Thank you!!

    • Charles says:

      Connie, review IRS Publication 4681 to see if you qualify for the insolvency exemption discussed in the article. If you were not insolvent at the time the debt was canceled, then you will need to count the 1099-C amount as ordinary income, which will have the effect of increasing your overall tax liability and therefore decreasing any refund otherwise due (or yielding a bill for taxes owed if your refund is insufficient to offset the taxes owed against the 1099-C income).

  103. N icky says:

    I have several 1099-C reports from different banks for 2012. Do I have to do insolvency worksheet for each 1099-C as the date of cancellation is case sensitive or do I have to do a worksheet for all the reports together? If that is what I have to do which of the different cancellation dates should I put in the form? Your help is very much appreciated.

    • Charles says:

      Nicky, you only need to file Form 982 with your 1040 return. Yes, you perform an insolvency calculation for each successive settlement you negotiated, in chronological order, because your list of assets and debts will change as each prior debt has become resolved. With one debt out of the way, you owe less debt overall, but your assets are also reduced by whatever you paid on the settlement. But the Worksheets are just for your internal records, in case of audit.

  104. Mike says:

    Charles, Thank you for the great research. Your posts has answered most all of my questions. As far as credit reporting goes….I had a defaulted credit card balance completely cancelled/forgiven…I did not settle…they just forgave/cancelled it after the collection agencies didn’t get anywhere and SOL expired…Since it is “cancelled debt” seems possible that I may be able to dispute it with the reporting agencies and have them delete it. What do you think Charles? Thanks again.

  105. Jeff says:

    My home was forclosed in December 2012, and i recieved the 1099c yesterday. When im adding up all the debt to see if im insolvent do i include the amount on the 1099c as well?

    • Charles says:

      Jeff, yes, you calculate insolvency just prior to the date on which the debt was forgiven. So the net worth calculation includes the full face value of the debt before it was forgiven.

  106. Mike says:

    Charles, just an additional fact on my above question…I did receive the 1099c on the cancelled debt. Thanks again!

    • Charles says:

      Mike, the cancellation of the debt obligation has nothing to do with the 7.5 year reporting period on your credit file. If the information reported is accurate, it won’t come off via a dispute letter. But the good news is that prospective creditors will no longer consider it as a debt you owe, so it should improve your debt-to-income ratio.

  107. Cat says:

    Hi Charles, I just wanted to let you know that this article is very informative, especially to those in panic mode. I have a couple questions if you don’t mind. I just received a 1099 C on a deficiency from 4.5 years ago when I lost my job and had to turn in my vehicle at the time. I didn’t have any opportunity to settle this debt so the amount is the full difference of a little over 20k. My questions are,

    Which date do I use for figuring insolvency in this case?

    Is the 20k the amount that I would enter as a liability on the insolvency worksheet, I didn’t own any other property at the time and still do not?

    Since the amount is showing under the box 2 of Amount of debt discharged, does this mean that the debt is cancelled and it can no longer be collected?

    Under box 5 there isn’t a check mark in the spot for the debtor being personally liable for the repayment of the debt, what does that mean?

    Thank you for your time.

    • Charles says:

      Cat, the date for figuring insolvency would be whatever date they are showing for “date of identifiable event” under Box 1 on the 1099-C. You calculate your net worth as it would have been just prior to that, and including any balances still owed on this deficiency at that time. If you had no other debts at that time, and no assets, then you were insolvent by $20k and have a full offset. If you had bank account balances, say, at $10,000 on that date, then you would be insolvent by only $10,000 and liable for taxes on the difference of $10,000. I’m not sure why they omitted the check on Box 5, since that box is usually checked. If there is language on the 1099 that “debtor was personally liable” there doesn’t have to be a check mark. As to the liability itself, the technically correct answer is that forgiveness in this context does not necessarily preclude future collection activity. Although in practical terms, it is quite rare to see further collection activity once the 1099-C has been issued.

  108. Dustin Rivera says:

    Hey Charles, Got a question..My wife and I received a 1099-C form today. It indicated that she owed 11,640.00 for an old auto (2004 Ford Explorer) loan that she and her ex-husband had. The vehicle was purchased in 02/2004. They were divorced in 08/2005. Per their divorce decree, he was responsible for the car and was awarded the car where he made payments until 03/2007. The car was later repossessed, I believe. Is she reposnisble for this debt although per their divorce decree, he was given the car. He is the one who defaulted on the loan. Any help would be appreciated… I guess I should ask, will she have to claim this as income…..per the 1099-C form?

    • Charles says:

      Dustin, divorce-related agreements do not revise the original contract at time of purchase. So if your wife’s name was on the contract for the auto loan, then she can still be affected even though her ex was supposed to be responsible for the account. So yes, this 1099-C will have to be treated as income, unless she was insolvent at the time the debt was forgiven. See IRS Pub. 4681 for explanation on how to calculate insolvency.

  109. Margie says:

    Hi your information has been great, as I have been going crazy with the 1099-C in the amount of 20,094 that i received for three credt cards. I own no assets or did at the time prior to cancelling debt. I did not want to file bankcrupcy and thoght that working it out with the companies would of been better, NOT. I found the 982 Part 1 I maarked line B, then on Line 2 I entered the total amount, then on Part 2, I entered the total amount on line 10a. Does that sound right? Do I have to include a copy of the Statement of Insovency to IRS or just keep for my records? Thanks for your assistance.

    • Charles says:

      Margie, I can’t provide detailed tax preparation instructions via the blog, sorry. Please carefully read the instructions in IRS Publication 4681, which covers your questions in detail.

  110. Lori says:

    i received a 1099C for a car. I want to see if I qualify for insolvency but I do not know how to list my home as an asset. My mother is also listed on this loan, yet I am solely financially responsible. Do I only claim half the liability and half the asset?

    • Charles says:

      Lori, I believe you are supposed to only include your pro-rated share of the debt and liability, but call the IRS Help line and see what their answer is to this question. It may be that you can use the full value since your mother is not declaring insolvency and otherwise you’re the one responsible for the home loan.

  111. Missy says:

    Hi Charles! We received two 1099s from a first and second mortgage on a home we short sold last year. The first mortgage is clearly falling under the Mortgage Debt Relief Act — primary residence indebtedness exemption. The second mortgages is a cash out refinance, and here is where it gets tricky. We were insolvent by about $25k, which covers the $18k in cash we took out from the refinance, but not the full $38k debt cancelled by our second mortgage. I guess my question is, can we combine exclusions? Can I use the MDRA for the first mortgage COD and the COD from the second mortgage that originated with the home purchase, and then use the insolvency exclusion for the cash-out portion of the cash-out refinance?

  112. Liz says:

    I was wondering how to reflect my 401K on the insolvency worksheet. I received SSEP (equal period payments) from the money. So would this be considered income or do I need to show the balance as an asset? Thank you.

  113. Bob says:

    I negotated settlement of credit card debts with a number of credit card companies–two in December of 2011 and several in 2012. What I am finding on the 1099 c’s is that the identifiable event date does not correlate to the settlement date and is weeks, and in in some cases months beyond when the agreed payment was made with the debt collection agencies and the debt considered settled in full with the payment. What date can I use to do my involvency workup on each debt? What I am seeing is that that certain departments decide upon a diffent settlement date based upon their workload and not when the payment was actually made.

    • Charles says:

      Bob, this is something of a gray area. IRS Pub. 4681 says to do the calculation at the time the debt is forgiven, but you really have no way to know that precise date in advance. To be consistent, I advise my clients to do the calculation as of the final installment payment made for any given settlement, and also to do a separate calculation per settlement. But you’re right that the dates can be all over the map with different creditors.

  114. Andrea says:

    Charles, your information is very helpful. I have a question about what to list as an asset (I have clear the major categories) but what should I do with kid toys, clothing (it is impossible to find the FMP of every piece of clothing we own), DVDs, bedding, shoes, inexpensive decoration objects, etc?….how detailed it will have to be in case of an audit?

    • Charles says:

      Andrea, most people just estimate a single figure for miscellaneous household items. You can take the same approach you would if you were donating those items to a charitable organization. Google around and you should find some guides online about fair market value for such donations.

  115. Anne says:

    Charles, thanks for your help. I’ve read through all the posts, and so far have not seen my exact situation. I received a 1099C from Chase in my name for a credit card that I could not continue to pay on due to insolvency. The date of the cancellation was 6/20/12. My husband and I just short sold our house on 6/1/12. The bank for both our first and second loan was Chase. They have not issued us a 1099C, though they forgave the $89k we owed in the short sale. How to I calculate the insolvency part if in 3 weeks time we no longer had the debt of the house? Does it still count as part of the insolvency? Since Chase is the same bank for both (credit card and mortgage) and the date is the same month, I concluded they are related. Though I never “settled” with Chase for the credit card, the last communique with their firm handling my delinquency was 12/11 when we were in the process of the short sale. It’s the “immediacy” of the date that has me confused. Also, do we pursue Chase for a 1099C for the short sale? I appreciate your clarification on all this. Thank you.

    • Charles says:

      Anne, I can see your problem. You really don’t know what date Chase will use for forgiveness of the mortgage debt from the short sale since they haven’t sent the 1099-C yet. If the 1099-C date for the short sale is reported as 6/1, then you are supposed to do a separate calculation for that settlement alone. Then you would do a second calculation for the credit card 1099-C, without the property values included. However, it’s quite possible that Chase might show a later date for the write-off on the mortgage debt. It’s a bit of a Catch-22 therefore. I would first calculate insolvency without the property, on the assumption that Chase will use the sale date of 6/1 for that 1099-C. If that would leave you solvent, then go get help from a CPA who can determine the exact procedure that would be accepted by the IRS in this situation.

  116. DANIELLE says:

    Hi Charles,

    My only question that I am having a hard time deciding is what the day before my settlement was. I agreed to “a settlement” on 08/29/12 but that consisted of three large monthly payments to them and then they wrote my debt off in November. Which date am I suppose to add my balances for, Nov or Aug when I agreed?


    • Charles says:

      Danielle, the IRS instructions don’t specifically address how to handle settlements paid over a period of months, but it is probably best to use the date they did the write-off, rather than the agreement date. So you would calculate it for November in terms of your other assets and liabilities, but still include the full face value of the debt in question, prior to the write-off by the creditor.

  117. Derek says:

    I had 3 debt settlements in tax year 2011. I claimed one on my taxes, but did not receive a 1099-C for the other two and therefore did not report them. The IRS now says I owe for the other two (and in fact should because I did settle them in 2011). Now, is it too late to fill out my statement of insolvency? Also, can I even go that route since I already claimed a settled debt on my 1040?


    • Charles says:

      Derek, what I suggest is that you get in touch with the two creditors who didn’t send you 1099-Cs and ask for copies (unless you already received copies from the IRS itself). It’s not too late to do an amended return for the tax year 2011, which could include Form 982 updated with the additional 1099-C balances (assuming you are eligible for the insolvency exemption).

  118. David Conklin says:

    >If you are insolvent at the time you reach a settlement with a creditor, then you can offset the 1099-C income up to the total amount by which you were insolvent.

    That doesn’t help much when you owe $90K in school loans that were discharged because your income is below the poverty line (less that $11k) and comparing assets and liabilities shows that you are only in the hole by $3K.

    • Charles says:

      David, if the 1099-Cs you’re upset about were for the forgiven student loan debt, then you can include the $90k in the liability column and you would therefore be $93k insolvent overall and be able to claim the insolvency exemption.

  119. David Conklin says:

    Thank you!!! I was really worried there! I was worried that the subsidized housing I’m in would see this as income, which would put me over the threshold to live here and if the SS count it as income, then I’d get cut down to zero–homeless with no income!

  120. Debbie says:

    Hi Charles, first I just want to thank you for this information and for maintaining the blog! I started to search this topic again and wish I had found your blog when I filed my 2010 taxes. My accountant told me that Form 982 was just for businesses. I will be getting back with him on that erroneous information. My first question, I was ‘retired’ in 2009 when I was laid-off. Luckily I had worked for 36 years and qualified for a pension with the lay-off. On the worksheet, what does “Interest in a pension plan” mean? I get a monthly pension check, the income from which will be in my bank account balance. I want to make sure I’m not counting an asset twice. Same question for “Interest in retirement accounts” – I have an IRA with a value over $100k but I am only 57 and cannot withdraw without penalty. Is the amount invested in my IRA the amount I should use for “Interest in retirement accounts”? Again, thanks so much!

    • Charles says:

      Debbie, if you’ll read through some of the above comments, I believe I did discuss this issue in response to some reader questions. For a retirement account, you must take the full balance, not what you would receive net in a withdrawal. And for “interest in a pension,” you are supposed to calculate the present value of the future stream of payments. You may need help with that bit, but I would use a different accountant than the one who told you Form 982 only applies to a business. 🙂

  121. Debbie says:

    Hi Charles, if I must use the full balance in my IRA, then a quick calc is all I needed to tell that I won’t qualify as “IRS Insolvent”. Regarding my pension, I think it is now considered a permanent stream of income, as it is guaranteed for life and has a 50% annuity benefit for my husband if I die before him. Either way, that’s a moot point now.

    I so wish I had found your company before we entered into an agreement with a settlement company. We just completed that process and I am appalled at the amount of money we paid them in “fees”. The contract said it would be 15% service fee of the amount to be settled, but on top of that there was a monthly Account Maintenance Fee, a monthly Legal Administration Fee and if an attorney did anything they charged me $800.00 – that happened 5 times over the life of our 2-year contract. At least it’s over and a hard lesson learned. Thanks again.

  122. Debbie says:

    Charles, is it too late to file an amended return for the tax year 2010? The Form 982 does make a difference that year and we had one 1099C. Thanks again.

    • Charles says:

      Debbie, I believe you can file an amended return for up to three years, so you should be able to amend for 2010. Check the current for instructions on 1040X and that should confirm it.

  123. Debbie says:

    “Within 3 years after the date you filed your original return or
    within 2 years after the date you paid the tax, whichever is later”. Thanks!

  124. John Doe says:

    I have a unique situation.

    I Am expecting 5-6 1099c’s from multiple debt settlements happening this year. Do I fill out an Insolvency Worksheet for EACH settlement (even if from the same creditor/CA)?

    And then, Fill out only one form 982, discharging the TOTAL of ALL 1099c ammounts, just as long as each insolvency worksheet shows insolvency?

    • Charles says:

      John Doe, your situation is not at all unique. Multiple settlements are common. The instructions in Pub. 4681 don’t adequately address this, but you have the right understanding. You do one calculation per settlement in chronological order, then submit a single Form 982.

  125. Judith says:

    Dear Charles,

    I received a 1099-C for a house that I short sold. I was the only person on the deed but had a partner who had an agreement with me to share profits and expenses on a rental property we had. Now he does not want to pay the half of the taxes I have to pay as a result of the 1099-C (about $5,000). Through the years he always took the deductions on this rental property basis. He wants to have the 1099-C reissued and split between us but my accountant says the bank can not, or/nor will not split a 1099-C when only one person was ever listed on the deed. The taxes were handled by my accountant on a capital gains/losses basis. Can the 1099-C be split on reporting taxes without the re-issuance of a split 1099-C from the bank?

    • Charles says:

      Judith, I agree with your accountant. I don’t believe the bank could split the 1099-C. There is no valid basis for them to do so, since you are the only named party to the mortgage contract. I suggest you check back with your accountant to see if it’s possible for *you* to issue a 1099-C to your partner instead of trying to just split the figures.

  126. Mitch says:

    Did the rules on including an annuity as an asset change? You replied to a post in March 2011 as follows:

    Posted March 2, 2011 at 9:17 am | Permalink
    Katherine, my understanding is that an annuity that has been “annuitized” (converted into a permanent stream of income), is no longer treated as an asset, but rather a source of income. Similarly, Social Security is income, not an asset. Check with your CPA, but I do believe you can exclude both the annuity income and the SSN or pension income from any net worth calculation.

    In March 2013 you replied:

    Posted March 11, 2013 at 1:38 pm | Permalink
    Debbie, And for “interest in a pension,” you are supposed to calculate the present value of the future stream of payments. You may need help with that bit, but I would use a different accountant than the one who told you Form 982 only applies to a business.

    In the first post you seem to say that an annuity is not an asset. In the second post you indicate that it is an asset. I’m a bit confused?

    I too receive a monthly annuity/Pension for life. Do I figure the future worth and include
    this amount as an asset on the 982 worksheet. If that’s the case, this would exclude many people from qualifying for insolvency.

    Thank you very much!

    • Charles says:

      Mitch, you are mixing up a pension with an annuity, when these are not at all the same thing. If you will take a look at IRS Pub. 4681, page 6, the Insolvency Worksheet includes two separate lines for this. Line 29 is for “interest in a pension plan,” while Line 35 is for “other investments (for example, annuity contracts, etc.), so we are talking about apples and oranges. I recommend you consult with a CPA to get clarity on how your specific type of retirement contract should be treated.

  127. Jeanie says:

    I am confused – I have been disabled for several years, and finally received permanent discharge on my student loans, which had (due to interest prior to the conditional discharge) risen to about $105,000. I am trying to figure out how much to panic – we went through a Chapter 7 in 2010 and are just finally getting “back on our feet.” Definitely can’t afford a huge tax bill. Unsure how to properly calculate the insolvency issue – the debt was only in my name. But I am married – how do I tell which personal belongings to count as assets? Do my husband’s belongings count even though the debt was solely mine? What about bank accounts, vehicles, etc – owned jointly, but since debt was mine alone do I list the whole amount or do I list half of it, since it’s also his? Thank you!

    • Charles says:

      Jeanie, you should get assistance from a tax professional, but my take is that you have the option of filing a “married but filing separately” return. That way you could calculate insolvency only as it pertains to your own assets and liabilities. If you live in a community property state, then you own 50% of household assets regardless of whose name is on the asset, as well as 50% of the liabilities (ditto). So your husband’s belongings may or may not count depending on whether you are in a community property state. What I would do first is run the calculation just with your total household assets minus liabilities prior to the write-off, so including the full $105k of student loan debt. If the overall household figures show that you were insolvent by more than $105k at that time, then you don’t need to worry about these finer points anyway. But if a joint calculation would make you fully or partially solvent, then try it with a split return instead.

  128. Jeanie says:

    Charles, thank you SO much for your quick reply. I really appreciate your help! I will discuss with our accountant. But, I get the feeling you are better-versed in this area than she is… 🙂

  129. Nikki Blakely says:

    Hi Charles,

    I am in the process of settling w/ my second mtg lienholder – probably end of june.

    I am self employed, and right now in the process of figuring my taxes for 2012. Being SE I make quarterly pmnts to IRS.

    Would it be possible to pay an estimated tax payment for 2013 to the IRS now – thereby reducing my “assets” @ the time of settlement in June? i.e. after insolvency worksheet I estimate I am still to be liable for about $35K as income. Taxes based on this @ 25% approx $8900. I would just make an estimated tax payment of $9000-ish (would still owe more due to 2013 income)

    Yes, its a bit of a shell game, but would it work?

    • Charles says:

      Nikki, talk to a CPA, please. I have no idea whether what you are suggesting would be considered legitimate or merely tax avoidance. Best get some advice from someone who deals with the IRS on a regular basis.

  130. Jenny says:

    You already answered a ton of my questions above (thanks!) But I have 3 more questions for you.
    Background: We bought a $625K house in California using 100% financing. (yeah, I know…) 490k 1st mortgage, 135k HELOC. But 6 years ago we refinanced the HELOC for 159K and received an extra 24K. Some of the extra money went to car, debt etc., but some of that money did go to fixing the bathroom. (Not sure how I can prove it though – it was 6 years ago.) When the balloon came due a year and a half ago, they refused to refinance except on insanely expensive terms, and we refused to keep paying without a signed refinance contract. They also own our first, which we pay religiously. Rather than work out a re-fi, they just forgave the whole debt (now $165k including a year of late fees) So yay… except for the tax liability.
    1. Since the original HELOC was purchase money, even though we refinanced it, does 135K of the new HELOC count under the mortgage forgiveness debt relief act(leaving us with just the remaining 30K as taxable?) It was secured by the house, though the house is 150K underwater now. All this still in California if that matters.
    2. And then if we also go the insolvency route, do we then only have to prove 30K worth of insolvency?
    3. When proving insolvency, can we just provide the bank/credit card/401K statement issued right before? There may be a week or two gap, but the next statements are not for 3 weeks after the date on the forgiveness letter. Or do we really have to do to the penny the day before?

    Thanks so much for all your wonderful advice.

    • Charles says:

      Jenny, see IRS Publication 4681, page 12, detailed example #1 for a description of how to apply the MFDRA to a partial refi situation. Basically, you can only count as qualified indebtedness the amount that went to refinance the original purchase money note, so from your description, $135k would be exempt under the Act, with the balance of $24k (not sure where you got the $30k figure) on the $159k HELOC refi would be taxable outside the MFDRA. Check with the IRS help line, but I do believe you can also layer the insolvency exemption on top of the exemption available under the Act. You don’t need to provide anything other than Form 982 with your 1040 return, unless you are audited, and then would need current documentation proving the figures you are claiming for assets and liabilities.

  131. Wilma says:

    I am divorced but still noted as a co-borrower on the house – however the divorce decree states he has full entitlement and all related expense liabilities, including tax. The 1099-C was sent to each of us, however while sent to me with a partial of my SSN it does not indicate my full SSN number on this form and notes my birth year in the place of SSN. Do I still need to report this – even though I can provide notice to IRS that he is fully responsible. Do I need to add this income anywhere on my 1040 form or can I just include a copy with a note? Should I disclose insolvency to cover myself?

    • Charles says:

      Wilma, I’ve never seen a 1099-C that did not include the full SSN, so I’m not sure how to answer your question. Please call the IRS help line and see what they say. But I do think it would be wise to prepare the insolvency calculation if you qualify for that exemption. If you were insolvent by more than the amount forgiven in the claim, then I see no reason why you couldn’t just submit Form 982 with your Federal 1040 return to claim the insolvency exemption, and thereby put to rest any concern over back taxes on this claim.

  132. Wilma says:

    Thank you greatly for your time and reply. It is much appreciated.

  133. Brian says:

    I know you have answered the pension question with regards to the insolvency worksheet, but I am still confused. My wife and I are both educators and have a pension plan that we cannot touch without penality. For example, we can take out a loan against the pension, leading to more debt. I do not see my pension as an asset at this point,so I am not sure why I have to claim it as such???

    • Charles says:

      Brian, the short answer to your question is, “Because the IRS says so.” 🙂 Pensions and/or retirement funds are treated as assets for the purpose of calculating net worth, regardless of whether the funds are immediately *available* to you without tax withholding or penalty. If you need further clarification, please call the IRS directly.

  134. Ama says:

    Weird situation with my insolvency sheet. the 1099 c is in just my name. i am trying to determine my assets & liabilities on a separate return. we have a townhome that i am listed on the title/deed but not the mortgage. even though we pay for the mortgage from a joint account, can i list it under both assets and liabilities sectons or only under assets since my name is not on the mortgage. i live in Virginia.Thanks.

    • Charles says:

      Ama, not such a weird situation at all. You should confirm this with the IRS help line, but my take is that you should still be able to use 50% of the asset value and 50% of the mortgage balance on your separate insolvency calculation, assuming that you split the purchase responsibility 50-50 with the co-owner of the property. Just because you aren’t on the mortgage doesn’t mean there is a liability there, if you have privately agreed with the co-owner that you are responsible for 50% of the mortgage balance. Of course, the IRS may question it, so it would be best to have a formal agreement between you and the co-owner to make it clear you are paying 50% of the mortgage payment even though you’re not a party to the mortgage contract.

  135. Ama says:

    Thanks for your feedback. I called the IRS 3 times to be sure. All agents indicated filing joint does not imply assets and liabilies have to be listed for both people on the return if the 1099C was for only one of them. The taxpayer will have to list their portion of joint (50-50) assets and liabilities and the ones 100% theirs.

    • Charles says:

      Ama, thank you for posting the results of your conversation with the IRS. I’m sure this will be helpful to others trying to figure out how to handle this same issue.

  136. Heng says:

    Hi Charles,

    I had a settlement on my residential property but I own two other retal properties. Do I have to include all of the properties or just the settled one to determine negative or positive net worth?

    I also owed some money on my retirement account; is it considered as liability?

    Thank you Charles!

    • Charles says:

      Heng, you must include the asset & liability figures for all of your properties, to determine whether you were insolvent at the time you received a settlement on your primary home. You can’t take just the values associated with the primary residence, since the net worth calculation applies to your overall financial situation. For the retirement account, you must take the face value of the account for the asset column, but if you have a loan outstanding then that goes in the liability column.

  137. Martin O'Leary says:

    I am trying to stumble my way through this process of calculating my net worth prior to the cancellation of debt.

    However, my stumbling block is with respect to the marital home, at the time of cancellation we were separated but still able to file jointly, I was the sole bread winner. The house is under water, but do I take half of that or the full amount (as the debt is joint and several and she has no assets for the creditor to go after and no income).

    I have tried to get some direction from the internet, IRS etc.. but to no avail.


    • Charles says:

      Martin, if you’re talking about a joint return, you would take the full amounts of the house value and loan balances at time of settlement to determine insolvency. If it’s joint debt and you are filing separate returns then you need to prorate the figures between the returns. See example 3 on page 6 of IRS Publication 4681 for details on this latter scenario. I’m surprised that no one at the IRS could answer this!

  138. MIchael says:

    great info, thanks!
    just so I’m clear, here’s my question.
    My wife received the 1099C,and we file jointly. on the insolvency worksheet, do we include all my assets and liabilities or just the ones we have jointly?

    • Charles says:

      Michael, IRS Pub. 4681, Example 3 on page 6 makes it clear that if you’re filing separate returns you compute each spouse’s insolvency separately. There is no example offered of an insolvency calculation where you’re filing a joint return and one spouse is insolvent but the other isn’t, but my understanding is that the same test applies and you would include only assets in your wife’s name in the calculation.

  139. Angel says:

    About two weeks ago I received a letter from the IRS saying that a 1099-C was reported to them for a cancelled debt dated 12/31/11. Obviously, it says I should have claimed this on our (married, filing jointly) 2011 taxes when we filed in 2012. Had I known anything about it, I’m sure I would have, however I had no idea the debt was cancelled. When my first husband and I separated I ended up with a lot of debt in collections. I’ve paid some of them off, but this particular one has been weighing on me because even if they were to reach an agreement, I didn’t have that kind of money laying around. I’m pretty sure I would have noticed and/or remembered receiving the 1099-C in the mail. I haven’t heard a peep from this company since 2008, and now they’ve cancelled this debt? It just seems odd to me.

    Anyway, I don’t know what to do. Do I just pay the IRS over $1400, do I try to figure out the insolvency thing (which, excluding my husband’s income and assets, I definitely would be), or do I disagree with the changes because I never received notification of the cancelled debt?

    • Charles says:

      Angel, it’s common for 1099-Cs to show up in your mailbox years after the original default occurred. The creditor apparently gave up trying to collect and did a formal cancellation (which is not the same thing as the charge-off that took place after six months of delinquency). Consult with a tax advisor, or call the IRS help line to confirm, but it sounds to me like your best bet is to calculate whether you were insolvent at the time of cancellation. When you do the calculation, you should be able to include the full face value of this debt in the liability column. If you were insolvent at the time, then all that should be required is an amended return for 2011 that includes Form 982 to declare the exemption.

  140. seeker says:

    I am waiting for a SSDI determination. I expect to have student loans discharged due to disability around the same time. I do not currently have any assets, but I may receive SSD back pay. If I receive back pay, is that considered an “asset”? Would exclude me from being able to use the 982 form and insolvency because the student loan discharge amount would be considered taxable income?

    Thanks for your help!

    • Charles says:

      Seeker, check with the IRS help line, but I believe the answer would depend on the timing. If you have not yet obtained a ruling from the Social Security Administration, then you don’t have an asset yet. If the student loan discharge happens prior to your receipt of any ruling for back pay, then I don’t see a problem in declaring insolvency (assuming you don’t have other assets that would make you solvent). If you receive the back pay prior to the student loan cancellation, then the cash in your account becomes an asset. So you would need to run the figures at that point and see where you stand in terms of insolvency. It’s also possible to have partial insolvency, where some of the forgiven debt can be offset by insolvency, but not all of it. See IRS Publication 4681 for examples.

  141. Mimi says:

    Please help. We were able to settle two credit debts with the creditors because my husband received a personal injury award. We deposited the money to our bank account one week prior to paying the settlements. I read that since it was for personal injury only (no payment for loss of income or medical reimbursement) that it is excluded as income, but is it counted as an asset on our insolvency worksheet or is it excluded for this also? Thank you in advance for your assistance.

    • Charles says:

      Mimi, in the context of a bankruptcy filing, most states allow some or all of any proceeds from a personal injury claim to be exempt as an asset. However, I don’t see anything in IRS Publication 4681 that would permit this same exclusion for the purpose of calculating insolvency. Check with the IRS Help Desk to be sure, but I believe you are supposed to count this cash as an asset.

  142. Tomorrow says:

    I just wanted to say thankyou, for making this so plain, my timeshare offered a deed in.lieu and ive been researching my options before I accept the debt is roughly 21k, im going to go to the irs this friday since they offer free help, to help me list, im pretty sure im insolvent, but I dont want to mess up

  143. Kelly says:

    I’m in the process of having my student loans cancelled due to illness. Would the “magic date” for that be the date of a letter I receive or will there be an actual date the student loans are cancelled that will be obvious to me? Also, I’m considering selling a life insurance policy to a viatical company, again due to illness. In the IRS’s insolvency worksheet, they list “cash value of life insurance” under assets. Is that what one could normally sell a policy for, or would that include, in my case, the sale of a policy to a viatical company as well? And, if it would, is it the offer date from the viatical company that’s the trigger, or the offer acceptance date, or receipt of the funds date?

  144. Kelly says:

    Thanks in advance, Charles, for any light you can shed on my questions. I’m getting really confused and hung up on the dates – I know they’re important, it’s just not clear to me from reading the IRS publications when those dates are for student loan debt cancellation and viatical settlements (if viatical settlements are even included in the “cash value of life insurance” under assets.

    • Charles says:

      Kelly, you should confirm with the IRS Help Desk, but the event date is normally the date listed in Box 1 of the 1099-C. If the lender is fully canceling the student loan, you really don’t have any way to know in advance what precise date that accounting event will take place. You won’t receive the 1099-C until the following January, so if you are trying to run the insolvency calculation to anticipate tax impact, just take the date of the letter from the lender confirming the debt will be canceled. Be sure to INCLUDE the full balance of the student loan debt in the liabilities part of the calculation, since this is a snapshot just BEFORE the debt was forgiven.

      As to treatment of life insurance policies, the cash surrender value is not necessarily what a viatical company would pay you for the contract. If the debt cancellation takes place before you sell the policy, then you’d just be taking the cash surrender value for that asset. Otherwise, if you sell the policy before the debt cancellation date, your asset would be the amount you sold the policy for to the viatical company.

  145. Mrs.Oliver says:

    My spouse just received an old 1099c from his old address yesterday. Trying to fill out an insolvency worksheet and file an amendment. We filed jointly back in 2012. Should I list my retirement as his assets? Also I already owned the house prior to us getting married should I list the mortgage as his assets and liability? He is NOT listed on the mortgage or deed. Thank you so much.

    • Charles says:

      Mrs. Oliver, if the 1099-C was only in your spouse’s name, then calculate insolvency on the basis of his assets and liabilities alone. So you would exclude the property if he is not a party to the mortgage and he’s not on the deed, and it’s also not necessary to count your retirement funds as his asset. The only exception to this is in community property states, where any assets or debts created after the date of marriage are 50-50 regardless of who is named on the account.

  146. Lance says:

    I filed for bancruptcy in 2009 and did not reaffirm the mortgage or the LOC. My wife is cosigner on both documents. We have to foreclose and I wanted to know will I receive a 1099C also, because I have $40,000 in student loans that would help show insolvency and we would be filing a joint return? She would still be insolvent but by a lessor amount. So if she is the only one that recieves a 1099 can I still use my student loans since it will be a joint return? Thanks

    • Charles says:

      Lance, the insolvency calculation has to be performed separately for each person that receives a 1099-C for the canceled debt, regardless of whether the return is being filed jointly or separately. However, if the mortgage debts were included and discharged in your own BK petition, then that should also have discharged the taxes at the same time. So it would only be your wife’s calculation that would pertain. If she is the only one who receives the 1099-C, then you would not be able to use your own student loan debt as part of her insolvency calculation.

  147. Charles says:

    [UPDATE December 2013 — NEW Insolvency Calculator now available! Only $29 to save countless hours of frustration! Instant download. Read more …]

  148. Lee says:

    I had a student loan of 36,500 discharged for disability in January 29, 2013. I am confused as whether to include assets at the time, or things I got after that time the same year. I got some cash from a disability policy (non-taxable income) and paid debts off and bought a house with the cash in October 2013. Do I count those as assets, or only use the debt and asset situation as it was in January 2013? Is the bank account to be as it was January 2013 or later, since it was so much different later? I’m just confused.

    • Charles says:

      Lee, you are not alone in being confused on this issue! If your debt was canceled on January 29, 2013, then you would calculate the insolvency figures as they were just BEFORE the cancelation event. So for practical purposes, you should be able to use the figures as they were as of the 28th, the day before. This means the amount discharged is also included as part of your overall liability for the purpose of the calculation. Anything that happened after the 29th would not be relevant for the purpose of determining the insolvency exemption. FYI, my new insolvency calculator will help you understand all this better. It’s only $29, and available for immediate download.

  149. Pat says:

    Hello Charles:
    I have spent countless hours trying to decipher the 982 form and 4861 worksheet instructions as they pertain to my situation. I’ve sought assistance from tax professionals in my location, communicated with a Turbo Tax EA, read IRS instructions and internet based content on this subject and finally contacted the IRS helpline only to be told that no one can answer my questions as the department that handles these matters was cut due to budget reductions! So thank you for your site. You certainly provide a wealth of information in easy to understand language. I think I understand the basics, but would feel much more comfortable having sought your opinion on my situation.

    We live in Florida which is not a community property state. We have always filed MFJ and would like to do so again this year for optimal tax advantages. I received a 1099-C this year in my name only for disability discharged student loan debt of $60K for which I was solely responsible. I have credit card debt of $25K in my name only. I share a $140K mortgage debt with my husband. We have less than $3K in the bank, a car valued at $2891 by KBB which is in my name only and about $7k in shared personal belongings including clothing, computers, tools and furnishings, etc.Our home is currently valued at $145K max, but I was told by a realtor it was worth $140K at the time my debt was discharged in August 2013. I have been told my husband’s pension does not count as an asset for him or for me and his only liability is our joint mortgage debt. He is currently in jail but we did live together early in 2013 before he was arrested.

    We both receive Social Security (his has now been terminated due to his conviction) and I received a retroactive Social Security check for payments due from 2011- 2013 when my disability was adjudicated in February 2013. I was required to returned all but $448 of it to my long term disability provider and did so in early 2013. I also receive a tax free monthly benefit from them as long as I remain disabled that terminates at my normal retirement age in March 2015. He receives a monthly single life pension that terminates upon his death. I signed off any interest in his pension at the time he applied for it in 2008 so I have no direct entitlement to his pension now or in the future.

    I have been told that we can still file MFJ and include Form 982 to exclude my cancelled debt from income calculating my assets and liabilities only on the 4861 worksheet. I was told to list 100% of my debts and only 50% of our shared debt in my calculations. I have also been told I can file MFS and complete the form 982 listing my assets and liabilities only. The problem is in filing a MFJ return we have no tax liability, but when filing MFS while I have no tax liability, my husband would owe $2K+ and have penalties for underpayment. In calculating the MFS returns I allocated 1/2 of our joint mortgage interest and taxes to each of us and then included other deductions according to who actually received each deduction. While his income was higher than mine, I have substantial medical deductions and some donations in my name that I included on my individual return and we both lose the student loan interest deduction when filing MFS.

    Because I have found so much conflicting opinion I am still confused about and would appreciate your take on the following:

    1. Is my husband’s pension considered income or an asset for worksheet 4861 calculation purposes?

    2. If it is an asset, do I need to and how do I calculate its value to fill in “interest in a pension” on the 4861 worksheet?

    3. Am I correct that in filing MFS each of us would only use the income and deductions in our own names whereas in MFJ all of our income and deductions, joint or individual, would be included on the same return?

    4. Can we file MFJ and include a 982 that has been completed using only my assets and liabilities or must it include our joint liabilities and assets because we are filing MFJ?

    Any light you can shed on this would be greatly appreciated.

    • Charles says:

      Pat, not surprised you are confused on this subject! I recommend you invest $29 in my calculator product, available for immediate download. The user guide goes into a lot of detail, and I’ve tried to “translate” the IRS-speak into plain English. Yes, “interest in a pension” is an asset, and it requires an actuarial table to determine the value — this part you may need further help with above and beyond what the calculator provides. However, there’s no question that you are permitted to file jointly and still do the insolvency calculation as it would pertain only to the assets/debts of the person named on the 1099-C. It is not necessary to file MFS to handle it this way. See the examples included with the calculator for more info.

      • Pat says:

        Charles, I know I am insolvent using just my assets and liabilities. How I might be required to handle his pension was the only real variable. As long as I can file the 982 using just my assets and liabilities, which would not include his pension, and attach it to our MFJ return, through which we get the best tax advantages,I am greatly relieved. I will likely download the software as you suggested just to be certain I’ve covered all the bases. The fee is so reasonable particularly in light of the thousands I would be facing in IRS debt without an insolvency exclusion. Thank you so much for your assistance!! Pat

        • Charles says:

          Pat, you are welcome. After you download the zipped file, open up the User Manual and go to Example #6 where I show a sample of MFJ with split calculation for insolvency based on the 1099-C being in only one spouse’s name.

  150. Kirk Taylor says:

    This is an excellent post on insolvency and this site is a great reference for debt consolidation. Much better than the “services” available in the marketplace. I personally reviewed the insolvency spreadsheet, and, as a tax guy, I can assure you that it is excellent. All my clients will be directed here. The instructions alone are worth the $29!

    For a tax guy’s perspective on cancelled debt and insolvency, check out my blog:

  151. Paul says:

    Thanks for your worksheet- got it figured out!
    My question is how to ( or whether to ) input info re: a leased car. It has no value to me as I will have to return it at lease end, yet I am liable for the remaining monthly payments on the lease??

    • Charles says:

      Paul, there is nothing specific in the IRS instructions that discusses vehicle leases. However, my take is that it wouldn’t apply to the calculation, since it’s not an asset. To my mind, it’s no different from leasing a house or apartment rental, where you sign for 12 months. The rent is just an expense, therefore not relevant to the insolvency calculation. If you were to break the lease and get billed for the shortfall, that amount would then be considered as a debt. So unless you have actually surrendered the vehicle and have a lease deficiency obligation, it would make sense to simply ignore the vehicle lease for the purpose of calculating insolvency.

  152. TaxGirl says:

    Does one have to include 529 account balances in the insolvency worksheet?

    • Charles says:

      TaxGirl, yes, the insolvency worksheet, line 30, is for “interest in education accounts,” which means any ownership stake in a 529 or other education savings account. Sorry. 🙂

  153. Phil says:

    Hi, I purchased the insolvency calculator and it works great it verified that I was indeed insolvent. My question is the IRS still wants proof can i copy the excel sheet and send that to them? Not sure what is appropriate proof for them. How would you handle this? Thank you

    • Charles says:

      Phil, no, don’t send a copy of the Excel sheet. Instead, get a copy of the blank Insolvency Worksheet from IRS Publication 4681 and transfer your insolvency figures to that format. Depending on what they have specifically requested, I’d also probably include backup for the fair market value listed for major assets like real estate, etc.

  154. Christopher M says:

    If I cosigned for a vehicle do I put the total bluebook value as my asset or do I only put half of its worth since I only cosigned for it? The vehicle is paid off. I also recieve ssi (disability) does that factor in too and how? I am going stop my ssi in about a month. Does the calculator take into account every single possible asset and liability possible?

    • Charles says:

      Christopher, if you share title to an asset with another person who is not named on the 1099-C in question, then you only need to include your ownership share of that asset (which may or may not be 50% depending on your agreement with the other owner). Disability income is not a factor in the calculation. The calculator takes as many possibilities into account as I could include without making the manual 10,000 pages long. 🙂

  155. Carrie says:

    If I receive a 1099-C as a result of a discharge of my student loans due to disability, do I fill out the insolvency worksheet based on the assets and liabilities that are in my name only, or do I include my husband’s assets and liabilities, as well? Does it depend on how we file our taxes? Thank you.

    • Charles says:

      Carrie, if the 1099-C is only in your name, then the insolvency calculation is based on your share of assets and liabilities. If you order the $29 calculator product, the manual provides illustrations for various filing situations, etc.

  156. Floyd Smith says:

    Hello My wife received a 1099c for 2395.00 we file joint return. I have been on short term and now on long term disability, and I’m currently filing for my social security disability. My wife subs at a school first is my income from the long term disability considered taxable or countable income taxable liability? I was told long term disability income is non-taxable sick pay income, and if that’s the case I should be able to file for insolvency, considering that my debt out ways my income. I don’t know if I’m wording this right, but I would love you input on this matter. Thanks.

    • Charles says:

      Floyd, you are comparing apples and oranges, income against debt. The insolvency calculation is not based on income, but rather assets against liabilities just before the debt was canceled. The insolvency worksheet in IRS Pub. 4681 indicates that “interest in a pension plan” must be included as an asset. Tax professionals have generally interpreted this to mean private pensions through employers, but there hasn’t been any IRS cases/decisions (that I’m aware of) pertaining to Social Security income in general, or SS Disability Income in particular. You don’t indicate in your question whether your long term DI is private or from SS, but either way I’ve not seen anything in Pub. 4681 that would require inclusion of disability income as part of the insolvency calculation. I recommend you double-check this with the IRS help line, but you may or may not get a straight answer!

  157. Mauri says:

    Hi Charles, Great source of information, hope you still checking this feed.
    Here is my question.
    I am working on my Insolvency Worksheet, For liabilities, I know to include all debts that are on my name only. Like my primary residence mortgage ($300) is on my name only (100%).

    However, my primary residence’s deed is my name and wife’s name. So our primary home Asset is 50% mine 50% hers (FMV $400). Should I include only my 50% in the list of Assets in the Insolvency Worksheet?
    Liability $300 – Assets $200 = $100 insolvent. Is this right?
    Thanks for your help.

    • Mauri, yes you have it right, assuming the 1099-C is issued solely in your name, and not for a debt that was joint with your wife. The insolvency calculation is based on the assets vs. liabilities for just the person named on the 1099-C, even if you file a married joint return otherwise. Under these conditions, married persons can indeed split the household to determine separate assets vs. liabilities. You have a joint asset in the house, so can split that 50-50 for the calculation of assets. But the mortgage is not joint, so 100% of that can be counted as your liability. It’s not a common situation, since most couples are on both the title and the mortgage, or just one name on both. But I don’t see anything that would preclude you from calculating it this way.

  158. jacob williams says:

    Hey blog post – I Appreciate the specifics ! Does someone know if my company could possibly grab a sample Insolvency Worksheet form to fill in ?

  159. James says:

    Hi Charles. I had to close a business that didn’t survive the Great Recession and in 2011 had to file bankruptcy. I was responsible for the debts because as an S-corp, I had to sign for everything, but only me. After the business bankruptcy none of the CC companies or banks came after me (well one did, but after a letter from the attorney about the business bankruptcy, they haven’t chosen to do so), so I didn’t file personal bankruptcy.

    Last year I received a 1099c for 4.5k. My former CPA, after charging me for research (apparently didn’t know much about it) and doing our simple tax, said I would have to pay the tax on it, even after I had mentioned the 982, and so I did. This year is a different story. Another 1099c came in for 49K. Definitely can’t pay that (not asking the former CPA either).The business bankruptcy sheet for liabilities showed over 245k for liabilities and assets were about 21k.

    1. Do I use those figures from that sheet as well as the split of my personal liabilities and assets (we live in Florida) to determine insolvency?
    2. We also had to refinance the house in 2003 to get an extra 25k to start the business and the wife put the mortgage in her name only since I was borrowing for vehicles and equipment (although the house is in both and money from both of us was used to pay the mortgage). Can I still use the mortgage amount owed in 2016 for half of the liablility even though it’s in only in her name?
    3. Is filing jointly still possible? (Sounds like I need to download your calculator.)
    4. Is it possible use a 1040x to get the $800 back from the previous year (assuming my insolvency numbers are correct)?

    Thanks for your help, you are a valuable asset (that we don’t have to put on our taxes) to many people.

    • James, thanks for the kind words. It would take me quite a while to answer these detailed technical questions via the blog, so let me please point you to the Insolvency Calculator product with its detailed User Manual. I believe it will answer most of what you are asking. With taxes on $49k at stake, it’s worth the 29 bucks. 🙂

  160. Deborah Richman says:

    Thanks for all this good info, but couldn’t find anything that answered my question on assets. I have a receivable from a company that I jointly own. Not sure I will get repaid. Is that receivable considered an asset for insolvency

    • Deborah, this is actually a complicated question. Receivables are generally considered to be assets in terms of how business accounting works. However, companies buy and sell receivables routinely at discounted valuations. Please check with your CPA, but my take is that you’d need to determine the current market value of the receivable and use that as the asset value when determining insolvency.

  161. ed falter says:

    My bankruptcy/tax question is that after a 2011 chapter 7 discharged bankruptcy for my rental property, Now the house was finally handed to the bank via DIL in December 2016. The bank has send a 1099A with FMV of 585k and secured debt 483k. My cpa has calculated $80,000 in taxes owed, along with my adjusted basis on the property. Since there is no debt to forgive, form 108 isn’t an option according to the CPA. Because the property was higher than the debt I have accrued capital gains tax. How can I have capital gains on a property that was discharged in bankruptcy? I didn’t own the house after 2011. I only managed the property until the bank decide to act on the foreclosure. I didn’t realize any gain. Can you please let me know if I have any options to proceed through solvency with IRS, my previous 2011 bankruptcy, or do I need to file bankruptcy on the capital gains tax from the house again(which makes no sense to me).

    • Ed, thank you for posting your comment/question. I am not an accountant or CPA. Your question exceeds my knowledge and expertise in this area, sorry. I recommend you consult with a tax expert, like an Enrolled Agent for the IRS.

  162. Darla says:

    Ok I have a situation that a lawyer that won’t see mus until our court date because we are starting foreclosure process because of major job losses two! She stated we could get solvency on forgiven debt bback that was already taken out of previous taxes aand 401k was gravely tax along with penalties and we can get insolvency back for part of that too! We have the forms but no place says how to get the 401k penalties and over charges taxes back that we used to live on after job loss. We need this money back to relocate and need to know how to make this work in our favor since nothing has worked up til now. Really need emergency funds to start over in a better state that has proper employment!

    • Darla, it sounds like you need to file an amended tax return with the IRS. I’m not a tax advisor, so I strongly recommend that you get some help from a CPA to figure out the correct forms to submit for a refund based on amended prior year return.

  163. DB says:

    Do you include 457B totals and pensions as assets?

  164. Christine says:

    My brother was insolvent when he passed. I understand I need to use the value of his PERS account at the time of his death to offset the insolvency, $19K. The Estate received the actual distribution several months later (22K) from the PERS account and the associated Form 1099-R. Does the Estate need to claim the full value (22K) of the disbursment or is this number offset by the income claimed due to insolvency (19K)?

    • Christine, it seems like you’re not quite understanding the calculation. Assets are not used to “offset” insolvency, but rather to determine whether or not insolvency existed at the time of debt cancelation, thereby permitting an exemption on 1099-C income up to the level of insolvency. If everything else added up to $19k of negative net worth, i.e., he was insolvent by $19k if the PERS account did not exist, and then you determined that $22k was the value of the PERS account, then he was solvent at the time of forgiveness and not insolvent. Yes, you have to include the full $22k in the asset list.

  165. Jane says:

    My husband passed away last year and I received his Fed student loan discharge 1099c due to his death. would you please tell me if this is correct”
    tell me if this is correct: Doesn’t matter if I file MFJ or MFS. I list 100% of his assets and liabilities and half of the joint assets
    and liabilities on the insolvency worksheet. Should I list the check/saving account as assets if I am the sole owner after he passed away?

    “Accounts With the Right of Survivorship. Most bank accounts that are held in the names of two people carry with them what’s called the “right of survivorship.”
    This means that after one co-owner dies, the surviving owner automatically becomes the sole owner of all the funds.

    • Jane, it seems you have the right understanding on the calculation, taking 100% of his assets/liabilities and 50% of any joint assets or debts. To your question about the checking/savings assets, my interpretation is that if it was a joint account, you’d still take 50% of the value for the net worth insolvency calculation — that’s because the insolvency calculation is supposed to be performed on the numbers as they were just prior to the debt being canceled. At that point, you were technically not yet sole owner for that joint account.

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