The IRS has a provision within its statutes that gives it the power to take any forgiven debt and consider it to be income. If you undergo a a bankruptcy process, or have your home foreclosed, any debt that is erased through these processes is considered to be ‘forgiven’ debt. This means you may have to include these amounts in your tax return and this could lead to a significant tax debt.

There is good news in amongst all the bad. The Federal taxation legislation has been amended to protect people in these situations. Most states have followed the Federal lead, although not all. Under Federal legislation, the loss of a primary home will not draw income tax liabilities nor will debts that are wiped through insolvency (bankruptcy).

Creditors will often send you a 1099 – this is an notice that the forgiven debt has been reported to the IRS. If you receive a 1099, then you will meed to submit a tax return that responds to that report. Failing to respond and answer those 1099 reports could result in a tax liability that could be difficult to clear.

If you are considering bankruptcy, talk to a bankruptcy lawyer first. They can set you straight on what your obligations may be on a state and federal level when it comes to taxation and any other matter. The last thing you need is to feel that you are free from debt only to find it’s back around your neck in another form.

Related posts:

  1. Christmas The Worst Time Of Year For Credit Cards
  2. Busting The Myths Behind Foreclosures And Bankruptcy
  3. Should You Use Bankruptcy To Stall Possible Illegal Foreclosures
  4. Bankruptcy, Foreclosures and Short Sales
  5. Economic Blues, Record Foreclosures and Exploding Bankruptcies