TAX CONSEQUENCES OF FORGIVEN DEBT

                I am not a tax attorney nor am I an accountant and I do not hold myself out as either, but the issue of the consequences of forgiven debt is often a topic raised by my bankruptcy clients.

Debts discharged in a bankruptcy case do not result in tax consequences.  However, if you avoid filing bankruptcy because you were able to successfully negotiate a settlement with a creditor to pay a lesser amount or you lost a home to foreclosure, personal property to repossession or you defaulted on credit card debt, you may have been “forgiven” a debt.

Forgiven debt is considered to be income by the Internal Revenue Service (IRS).  The result may be you owe the IRS more taxes because of the forgiven debt.  The reason this happens is because the IRS is counting the forgiven debt as income to you!

A financial institution, bank, credit union, credit card company or government agency that forgives or writes off a debt that you owe that that is more than $600.00 of the debt’s principal is required to send you and the IRS a 1099C form in January of the coming year.  A 1099C form is an income reporting form that is to be used in reporting income on your tax return and you must pay tax on that forgiven debt “income.”

Even if you get a 1099C form from a creditor you may not have to report the forgiven debt as income, there are some exceptions.  If you lost your primary residence to foreclosure and the mortgage was to buy, build or restore the home and the “forgiveness” of the debt took place between 2007 and 2012.  There is a mortgage exception that will help you.  There are limits on the exception to balances of less than 2 million dollars.  Be sure to see a qualified Certified Public Accountant (CPA) in the preparation of your taxes when faces with forgiven debt.

There are other exceptions including student loans cancelled because you worked in a particular profession for a particular employer as required when you took the loan and your diligence resulted in the cancellation (see IRS Publication 525).  Another exception exists for forgiven debt that would have been deductible on your tax return if you paid it.  Still another exception exists if the debt was forgiven as a gift to you (this would be a rather unlikely situation).

There may in fact be some additional exceptions that a good CPA may find and in any event, the additional forgiven income is only one small component of your overall tax liability when doing your taxes.  In fact taxes on forgiven debt are not owed if you were insolvent before the debt was forgiven.  Insolvency may mean different things to the IRS than it does to you, so again, use the services of a competent CPA when preparing your tax return requires that you deal with income in the form of forgiven debt.

If you are in foreclosure or contemplating the “short sale” of a property, see a bankruptcy attorney before the foreclosure or short sale are complete.  A completed foreclosure or short sale may result in a non-dischargeable tax debt for forgiven debt that the filing of a bankruptcy case may have wholly avoided!  Most bankruptcy attorneys will charge you NOTHING for the consult – do not wait.

If you receive a 1099C form from a creditor, you will need to complete IRS Form 982 if you are claiming an exemption applies in your case.  The form can be complicated and claiming the insolvency exception may be tricky.  Remember my entreaty above – uses the services of a competent CPA to prepare your taxes if you receive a 1099C form from a creditor for forgiven debt

Bruce C. Truesdale

There are so many foreclosure scams out there now.  I feel like as a personal bankruptcy attorney I get to hear about all of them several times a week and my response is the same as it is with every other easy fix out there, “If it sounds too good to be true it probably is.”

There are a couple of really good tip offs that you are dealing with a foreclosure scam and not the real thing.

The first is that you live in New Jersey and the “assistance program” you are using is based on Ohio and not affiliated with any government agency or mortgage company.  This should be a dead giveaway.  If you are seeking assistance for a home in New Jersey, there are non-profit housing counselors in New Jersey that can help you.  You shouldn’t be paying someone in Florida to do this for you.

The next big tip off is that they ask you to pay them instead of paying your mortgage company.  This will get any personal bankruptcy attorney’s spider sense tingling when you tell us about how they are helping you.  We immediately become concerned because whatever you paid them is now gone.\

For more foreclosure scam tip offs visit our foreclosure scam list or call one of our Middlesex County bankruptcy attorneys at 732-302-9600!

CAN THOSE “CREDIT REPAIR COMPANIES” REALLY GET

BAD STUFF OFF MY CREDIT REPORT?

            So you have had some problems with getting things paid off in the past and there’s some bad stuff reported on your credit report.  Or maybe you have completed your bankruptcy case and you got a letter in the mail from a company claiming that they can get that bankruptcy case and the other negative credit information off of your credit report.  Hmmm, sounds interesting, right?

Your bankruptcy attorney told you that negative information can stay on your credit report for up to 7 years and that your bankruptcy case will stay on your credit report for up to 10 years.  But this letter from the company claiming they can clean the bad things off your credit report is on nice stationary and looks expensive, what’s the story the real story on this credit repair companies?

Well, your bankruptcy attorney told you the truth!  Remember the old adage that, “What sounds to good to be true probably isn’t?”  That applies here.

You are not helpless before the credit reporting agencies (Experian, Trans Union, Equifax).  Your Federal Government has enacted legislation to try to protect you and to give you some tools if your credit report is wrong.  The legislation is called the Fair Debt Collection Practices Act.  The Act, among many other things, gives you the right to dispute any information in your credit report that is incomplete or inaccurate.

Now here is how those “Credit Repair Companies” try to “game the system” and get adverse information off of your credit report.

When you want to dispute inaccurate or incomplete information that appears on your credit report, you send a letter advising of the inaccuracy to each credit reporting agency that carries the disputed information.  Once the reporting agency receives your letter, it must investigate the accounts you dispute and record on your credit report the current status of the information you dispute or delete it within 30 days.  If the credit reporting agency cannot verify the information that you have disputed, the information must be removed from your credit report.  If the investigation finds that the information is inaccurate or incomplete, the agency must modify the information to make it accurate or remove it.

So here is the game the “Credit Repair Companies” play: They send in letters to the credit reporting agencies disputing all adverse information on your credit report.  If the reporting agencies verify that the information on your credit report is accurate, the information is updated and nothing is stricken from your credit report.  So, if that happens, the credit repair company sends out another letter and another letter and another letter disputing the debt.  You get the picture.  Their hope is that at some point someone fails to get the verification done in time or the reporting agency simply gets tired of verifying the information over and over again and it comes off of your credit report.  Some agencies may simply remove an item without investigating if rechecking the item is more trouble than it appears to be worth.

The credit repair company then sends you a copy of your “clean” credit report and asks you to refer them more clients.  Wow, great, so what’s the problem?

The problem is that your credit report is updated approximately every 30 to 90 days.  When it is updated it is more than likely that the negative information taken off, will come back.

The second problem is that you have paid a company to make fraudulent statements to the credit reporting agency on your behalf.  Now you probably won’t get in trouble for doing it, but we all have a moral compass that we carry around.  And if you want to play this game, why would you pay someone to do it for you?  You could do it yourself for the cost of postage because it costs nothing to request the investigations.

 

I’ll post some information on how to properly dispute incomplete and inaccurate information in the near future if you really do have some information on your credit report that is incomplete or inaccurate that you need fixed or removed.

 

Bruce C. Truesdale, New Jersey Bankruptcy Lawyer

Simple answer: YES!

Our philosophy in filing a personal bankruptcy case is to disclose everything and hide nothing in our bankruptcy filings.  Most of the time oversharing is in your best interests and undersharing will just get you in trouble.

For example, if you owe money to your grandmother and you plan on paying her back you MUST still list her as a creditor.  I use the word “must” because it is not optional.  You may not omit any creditor, no matter how much you like them.  That being said you can pay anybody you like back following your case, be that American Express or grandma.  It is in your best interests to sit down and have a candid chat with her, let her know you are filing and that you plan on paying her back when your case is over.  This way you avoid a problem with the bankruptcy trustee and the FBI.

Not sure if you have to disclose your asssets, check out our list of items that must be listed in your bankruptcy case and the consequences of failing to list these items.

Have more questions?  Give us a call for a free consultation at 732-302-9600 or fill out our easy 5 minute online consultation form and our New Jersey bankruptcy attorneys will call you!

Bankruptcy clients are incredibly concerned about their tax returns around this time of year.  Many personal bankruptcy clients depend upon tax refunds to get caught up on overdue power bills or other bills that have fallen by the wayside as they deal with their other financial issues.

The good news is, unlike in debt settlement, declaring personal bankruptcy will not result in forgiven debt becoming income and higher tax bills.

If you have already settled some debts before filing personal bankruptcy there is a form your accountant can complete to show that you are insolvent, evidenced by a personal bankruptcy.   Your accountant or one of our attorneys can assist you in preparing this form for filing with the IRS.

For more information check out our guide to taxes and your bankruptcy.

Interested in how filing personal bankruptcy can save you from the debt settlement tax trap?  Call our office and set up a free consultation with one of our bankruptcy attorneys at 732-302-9600.