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Some debt going unnoticed

Mar 09, 2012 Mike Garretson

When the economy takes a downward turn, taxpayers are often greatly affected, and amassing severe credit card debt or even declaring bankruptcy is not uncommon. Yet even when people get back on their feet, they are not always safe from their past choices, which has recently prompted the need for collectors to start finding debtors from years, maybe decades, ago. USAToday recently explained a little-known fact; after filing for bankruptcy, the debt that is forgiven is considered taxable income by the IRS. People in such situations will be sent a 1099-C form by the organization who dispersed the loan. The IRS predicts that 2012 will see creditors sending out 6.4 million 1099-Cs, an increase of 2.5 million since 2010, the source added. The news source cited that American Treasury regulations encourage lenders to send out 1099-Cs if there has been no attempt to pay off a loan in at least 36 months, regardless of whether or not the debt was forgiven. Time detailed that this can become a major problem for taxpayers in the near future, as approximately $75 billion in debt was forgiven in 2009 and 2010. The only way for citizens not to owe taxes on the dissolved debt is by producing records that prove the person with the loan was insolvent or the debt was forgiven in bankruptcy, USAToday said. The source also noted that it is not uncommon for the IRS to send out such forms pertaining to debt that was forgiven decades earlier.