IRS, 1099s and Bankruptcy

With the current economic crisis many people are receiving 1099-C forms from their credit card companies, mortgage lenders and other lenders for forgiven debts. These forms are sent when a credit card debt is written off or a home is sold at a short sale or foreclosure. The I.R.S. treats the write off as income. This income can dramatically affect a person's tax liability.

Forgiven debt is not necessarily taxable income. If a debtor files bankruptcy and the debt is discharged the I.R.S will not treat this as income. Also if the Debtor is insolvent when the debt is forgiven, the Debtor must account for this on their tax return. Currently homeowners generally do not have to pay tax on a principal residence for forgiven debt up to two million dollars.

Many people who work with debt settlement companies do not realize that if the company is successfully and their debt is reduced, they will receive a 1099-C and have a tax liability if they cannot prove they were insolvent. Unfortunately, most people who hire debt settlement companies soon realize that they are throwing their money away. The fees these companies charge are exorbitant and these companies have very little success.

My advice, avoid debt settlement companies and if you receive a 1099-C, consult your tax preparer to file the proper forms. If you are having financial difficulty remember that a bankruptcy discharge can
also stop the I.R.S. from treating the debt as income.

If you have questions about filing for Bankruptcy in Michigan, call John Steinberger today.

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