Being in debt can cause terrible stress which unfortunately does not disappear overnight. This problem cannot be ignored – as tempting as it would be to take those bills and literally shove them under the rug or toss them out. While millions of other Americans may be in the same boat, you must take control of your situation and sort your finances out, whether by negotiating with your creditors or exploring other debt relief options, to include bankruptcy.
You may be feeling great-and long overdue-peace of mind after seeing substantial debts squared away. You may have refinanced, completed a short sale, or even suffered through an unfortunate foreclosure. Or perhaps, with the help of an experienced debt relief attorney, you settled all your debts for less than originally owed. And while the priority is to take care of debts and seek closure, it’s very important that you understand all the ramifications of short sale or foreclosure, as well as any debt solution program.
Forgiveness of debt income occurs when you have seen a debt forgiven or canceled. This may happen during a debt settlement where the creditor agrees to take less than is owed, during a foreclosure, or a repossession. Your debt has been forgiven-but not forgotten!
A simple example of forgiveness of debt income would be that if you owed $15,000 to a creditor but settled the debt for $10,000, you will be expected to report that income of $5,000.
Bankruptcy involves a discharge of debts however, which is different from forgiveness. If you file for a Chapter 7 bankruptcy, many or all your debts-especially the unsecured ones-are discharged within three to six months. In a Chapter 13 bankruptcy, you can reorganize most or all your debts into a repayment plan that lasts three to five years. While most tax debt itself is not dischargeable, you will not have to report income for debts that have been discharged in Chapter 7 or Chapter 13.
If you received forgiveness of debt income from any transactions during the year, expect Uncle Sam to sit up and take notice. Taking care of your debts may have caused considerable strain-not to mention the stress of a foreclosure-but you may still be responsible for any cancellation of debt once tax time rolls around too. That’s a pretty big catch that you should have been well-apprised of before taking any deal. It’s fantastic to have debts paid off, but not so much when you receive a tax bill as a surprise! And foreclosure can, ironically, result in significant forgiveness income as the lender ‘forgives’ or cancels part of your home loan.
If you are facing foreclosure or considering a debt relief program and have questions about what to do, as well as complexities with debt forgiveness income, contact us now at Levitt & Slafkes, P.C. so our attorneys can review your case and help you move forward in a way that suits your needs best. We are here to help!