Question

Your clients Timmy and Tammy likewise are asset-rich / cash-poor. But what makes them “rich” is their home, which is worth way more than they still owe on it. But they’ve both been out of work because of the pandemic and can’t pay their bills. Several of their creditors have written off their debts and sent 1099-Cs. Timmy and Tammy adamantly refuse to seek bankruptcy protection.

Under state law, general creditors can’t foreclose on your house – it’s protected by “homestead” laws. So Timmy and Tammy tell you that they want don’t think that they have to report the 1099-C amounts because their home should be ex-cluded from their personal balance sheet, meaning (in their opinion) that yes they are “insolvent.” Admittedly they’re quite solvent if it’s included.

Your advice for Timmy and Tammy?

Answer 1

Fact:Timmy & Tammy are facing liquidity crunch and refuse seeking bankruptcy protection. Creditors have issued 1099 Cs.

Observations: House is protected by homestead laws. If he seeks bankruptcy protection then he could get exemptions on certain assets from being liquidated. Since during the pandemic businesses are affected globally, quite many entrpreneurs have sought bankruptcy protection. A creditor issues 1099-Cs as a cancellation of debt and which should be checked thoroughly by the borrowers. 1099 Cs are to be reflectedin your tax returns as an Income. In case the assessee wants to avoid paying tax on the same then he has to prove his insolvency in a way where his Fair Market Value of the assests is lower than the debt he owes only then he can avoid paying taxes.

Conclusion - From a taxation perspective he will have to reflect 1099Cs in his books and pay tax clearly since he is asset rich. As far as balance sheet is concerned he will have to show the accounting treatment.