Taxes on Student Loan Disability Discharge?
January 28, 2015 2:18 AM   Subscribe

I'll speak with a tax professional next week but if you've had a similar experience I'd love to hear from you as I'm feeling my way through this. Today I received a notice that my $20,000 student loan has been formally discharged. My only income for the past four years has been Social Security disability and there's no foreseeable change.

It was unexpected because I applied for discharge due to disability five years ago and a year later, after checking on the status, I got a letter saying my application was accepted, everything was in order, and to do nothing more unless I take a new job or return to school. Three years passed then suddenly I began receiving bills from a new lendor, Nelnet. They ignored all my efforts to communicate and I really tried.

In August I sought help from my congressional office and they were wonderful. Billing stopped and I submitted a form every few months saying things hadn't changed. There were two of these before the discharge today. The "Reason Code" the've entered is "F," for "By Agreement" and I wonder if this is as it should be given the circumstances, if the reason code affects whether or not I'll be on the hook for taxes, which I cannot pay. I've had two brain surgeries and am about to have another. I take heavy epilepsy meds., even had to have help writing this question.

If taxes will be a factor is it too late to negotiate the other way I've read about in which I agree to make payments tied to income for thirty years, for now the amount being "0" as disability does not count as income?

I'm so very grateful for your ideas.
posted by anonymous to Work & Money (3 answers total) 1 user marked this as a favorite
 
There should be a legal professional group in your area that can provide support at minimal or no cost (I don't know your situation, but an example here). If you'd like, send me a private message and I can help you find such assistance.
posted by miss tea at 3:38 AM on January 28, 2015 [1 favorite]


There is no Sec. 108 exclusion for disability discharge (there have been efforts to change this, but nothing has passed thus far). You may qualify for exclusion under the insolvency exemption though (see page 5 of Pub 4681 [pdf]).

Feel free to memail me.
posted by melissasaurus at 4:02 AM on January 28, 2015 [3 favorites]


This tax form is part of the TPD process. TPD can't be negotiated any other way. If you are low income, chances are you won't have to pay taxes.

When I received a disability discharge, I also received a 1099-C. My only source of income was SSDI. I filed taxes for that year and claimed the insolvency exemption.

If I remember correctly, I used a free filling app, and because my income / assets were less than the debt, I was able to claim insolvency. As a result, I wasn't required to pay taxes on the discharged loan. Of course, your situation may be different.

Also, for some reason, Nelnet recently sent me a new 1099-C form. They claim it was a mistake caused by my loans being temporarily reinstated, right before the final-final discharge.

Before you proceed, I'd recommend confirming its validity with Nelnet, and then sspeaking to a tax professional.

If you are worried about the cost, most regions do offer some sort of free or low cost tax advice for low income individuals. The IRS also has a hotline. It's worth confirming the steps you will need follow to ensure that you will owe as little as possible.
posted by bindr at 8:35 PM on January 28, 2015 [2 favorites]


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