Page 42 - October 2015

What can happen when you leave debt behind?
If you're thinking your debt is so large and so unmanageable that there is no way you could possibly ever pay it back, take note. Even if you are able to negotiate a debt cancellation with your financial institution or other lender, you may not be out of the woods just yet. You may be facing a huge tax bill. Certain exceptions apply, but if you receive a Form 1099-C – “Cancellation of Debt” - you must report the amount on that form to the Internal Revenue Service as taxable income. According to the IRS, nearly any debt you owe that is cancelled, forgiven or discharged becomes tax-
able income to you.
Why? The IRS classifies any debt cancellation as income because you received a payment you didn't return. When you first got a loan, you didn't pay any tax on the money you received because you signed a contract to pay it back. But once the contract is gone, the money is now yours to do with as you please. Basically, you received income for “free.” And, as everyone knows, there is no such thing as a free lunch. So Uncle Sam wants his share.
Common examples of when you would receive a Form 1099-C include credit card default, repossession, foreclosure, return of property to a lender, abandonment of property or the modifica-
tion of a loan on your principal residence. Certain exceptions and exclusions apply so you’ll want to consult with your tax advisor for more information.
In addition to your potential tax bill, comes the impact some- thing like this will have on your credit report and credit score. Late payments on loans, a past bankruptcy, debt collections or a court judgement ordering you to pay money as a result of a lawsuit are just a few examples of things that will negatively impact your credit score. In most cases, the higher your credit score, the better your chances of getting a loan with an attractive interest rate and repayment terms. So when it comes to getting a good loan, it is important that your credit report and score are in the best shape possible.
Before you ever get to this point, the first thing you should do if you ever feel you are in over your head with your current out- standing debt is contact your current lender or another reliable financial institution to explore all of your options so that you don’t have to go through one of these unfortunate situations. d
Matt Wiseman is the Director of Marketing at ISPFCU – Your Law Enforcement Credit Union. Membership at ISPFCU is open to all Illinois law enforcement employees and their families. Join ISPFCU today at www.ispfcu.org. Matt can be reached at mwiseman@ispfcu.org or 800-255-0886.
FINANCE
MATT WISEMAN
CHICAGO LODGE 7 ■ OCTOBER 2015 43