WILL MORTGAGE FORGIVENESS HURT MORE THAN IT HELPS?

A settlement has been reached between several of the mortgage companies and the United States Government regarding bad lending practices. As a part of the settlement, the balance owed on certain loans is being forgiven.

How can it be bad if a creditor forgives the debt on your home?

FORGIVENESS OF INDEBTEDNESS MAY COST YOU A LOT OF MONEY

Under the tax code, when a creditor decides to forgive the repayment of money that you owed to the creditor, this is a taxable event.  For tax purposes, this is treated the same as if your boss suddenly gave you a big bonus check.  If the amount that the creditor is forgiving is $100,000.00, then you may now have added to your real wages earned in the year that the debt was forgiven which in this example is $100,000.00. You have had no with holdings on this amount and all of a sudden, you have a huge tax liability.

WHAT SHOULD YOU DO IF YOU ARE OFFERED THIS FORGIVENESS?

You only have 30 days to reject this offer. If the amount that is being forgiven will cost you a lot of tax dollars, you may want to refuse the offer. You should contact your tax professional at once to determine how you should act.

WILL FORGIVENESS OF DEBT ALWAYS CAUSE YOU TO OWE TAXES?

The easy answer is no, there is not always a tax consequence. Your tax professional can determine if you qualify for one of the many exemptions that may keep you from owing taxes. You do not want to wait until it is time to file your tax return to find out what the result of this forgiveness will be for you.

If you are receiving monies based on your income, you might even lose the benefits or have to pay back money you received.

CAN YOU WAIT UNTIL I RECEIVE A 1099 FROM THE LENDER TO WORRY?

Do not wait to receive the 1099 to find out where you stand. Federal law requires that your lender send the 1099 to you if more than $600.00 is forgiven. You can bet that the lender is not going to pay fines for failing to send and file these documents with the proper tax authorities.

The second problem is that the lender is not required to send the 1099 to you until after the first of next year. The tax liability arises in the year the debt is forgiven, not, the year when you receive the 1099.  Things you may be able to do to keep from having a large tax liability have to be done, in most cases, in the same tax year as when the debt was forgiven.

WHAT HAPPENS WITH A TAX LIABILITY WHICH YOU CANNOT AFFORD TO PAY?

Lots of bad things such as being subject to tax liens, wage garnishments or other collection actions. You may have benefits taken or reduced that you are relying on to live. The ability of the tax folks, both state and federal, to take your assets is many times greater than any non-governmental lender.

WHAT SHOULD I DO TO PROTECT MYSELF FROM THIS TAX PROBLEM?

A resort that you may not like is to file bankruptcy in the same year that the debt was forgiven. This means that if the debt is forgiven in late 2012, you only have a few months to avoid the tax liability.  Under the Bankruptcy Code, if you file bankruptcy, the forgiveness of income tax liability ceases to exist if you file bankruptcy before the tax liability is established.

This is not the result if you file bankruptcy in 2013 to take care of a tax liability incurred in tax year 2012. In fact, tax liability incurred for tax year 2012 is not dischargeable for a long time after the 2012 year.

For more information on this matter, contact an attorney such as myself to make sure you protect yourself.

About Nathan Davis, Esquire

Born in Charleston, South Carolina, Nathan Davis has been practicing law for many years. Mr. Davis has a wide variety of experiences having practiced domestic relations, criminal law, social security law having also practiced collection law in the past. This knowledge is helpful when someone needs to restart their financial life. The practice is now primarily bankruptcy and debtor representation work, but, Mr. Davis continues to also practice real estate law, trusts and estates and a general litigation practice. I believe that the most important part of representation is trying to leave you better off when the case is finished than when you started. Although I will do as my client directs, I will always tell you if I think that you are making a mistake. Bankruptcy is about a "fresh start". If you do not make changes in what you are doing, you will be doing what you are doing now in the future. There is no shame in bankruptcy or other steps that you may take to start your life over. Too often, people worry more about things than about themselves, their family or their future.
This entry was posted in Broke Emotionally & Financially, Discharge, Filing Bankruptcy Issues, Making the Decision to do Something, Taxes and tagged , , , . Bookmark the permalink.

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