The Truth About Bankruptcy And Forgiveness Of Debt Income

DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

I was shocked to hear that some of my clients were about to pay income tax because of 1099-C forms received on rental properties they had abandoned.

Being my clients, they had already filed Chapter 7 and received discharges.

Which means, no personal liability on their debts.

Yet, creditors had sent them a 1099-C form, indicating the creditor had forgiven debt, resulting in income to my client.

I AM NOT A TAX ADVISER.

However, I do know that there is no income from discharge of a debt.

Which is the first box to check on IRS form 982 (available at www.IRS.gov):

“1 a Discharge of indebtedness in a title 11 case”

Title 11 is the Bankruptcy Code.

So, if you got or get one of these 1099 forms, and you filed bankruptcy, and discharged the debt, file the 982 form so the IRS knows.

Well, somewhere in there they know, as, for reasons that escape me, a notice of every bankruptcy filing is sent to the IRS.

Whether you owe them money and list them as a creditor, or not.

What if you did NOT file bankruptcy?

Form 982 1 e is for “qualified principal residence indebtedness.”

With the explosion of the real estate bubble, lots of homes are worth less than the mortgages owed on them.

Congress passed this exception, under President Bush, so if your home is foreclosed for $150,000, but you owed $300,000 on it, you do not have $150,000 of debt forgiveness income.

IF you qualify.

Basically, this exception is for money used to buy or improve your home.

If you took out a second mortgage to put money into your business, that will not qualify.

There are other exceptions, if you are insolvent but have not obtained a bankruptcy discharge, 1 b applies.

You have to go through the worksheet to see if this applies, but chances are it does if you are so far behind the creditor has charged off the debt and filed a 1099.

 

DISCLAIMER:  NOTHING IN THIS POST IS MEANT AS TAX ADVICE, CONSULT A PROFESSIONAL

 

The Truth About Bankruptcy And Forgiveness Of Debt Income

 

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3 Responses to The Truth About Bankruptcy And Forgiveness Of Debt Income

  1. I just wanted to thank you for all the great information. My husband and I claimed Chapter 7 and had it discharged in 3 years ago. Unfortunately our attorney said he had to reaffirm the mortgage and had him sign, but as of now according to not only his credit report when I checked but also a mortgage broker their is no mortgage currently present on his credit and it has been sold since the bankruptcy. The property was purchased in his name prior to us getting married. We are completely upside down and need a fresh start and would like to walk away from the property. How can I verify whether the mortgage was reaffirmed or not?