Does Filing Bankruptcy Impact My Taxes?
If you are overwhelmed by debt and in the process of reviewing your options, it is important to consider the tax implications of bankruptcy and other debt relief measures.
Fact: If a creditor agrees to eliminate or even reduce your debt, it could actually end up costing you a great deal at tax time. If the same debt is dealt with through bankruptcy, you would not owe any taxes on those debts in most circumstances. Filing bankruptcy instead of choosing a negotiated debt relief option could potentially save you thousands of dollars in taxes.
Why is negotiation so costly? Tax law looks at forgiven or reduced debt as if the creditor had given you the money to pay off the debt. For tax purposes, that money is treated as income, and you are required to pay taxes on all income. Debt relieved through bankruptcy, on the other hand, is not treated as income, and therefore has fewer or no tax implications.
Bankruptcy Often Does Not Affect Your Taxes
Debt that you shed through bankruptcy is rarely subject to taxing. This includes first or second mortgages on your home, medical bills, credit card bills, car loans and more.
It is possible that a creditor filed a 1099C on a debt that was discharged in your Chapter 7 or Chapter 13 bankruptcy, essentially declaring the discharged debt as income you received. This is an issue that can be easily resolved by filing an IRS 982 form to claim a bankruptcy exclusion and avoid being taxed when you shouldn’t be. The process is similar for your state taxes.
For more about how bankruptcy could impact your taxes, discuss your case with an experienced bankruptcy lawyer at Marrs & Terry, PLLC. Contact us to schedule a consultation. Our services are available to individuals in Ann Arbor, Genesee County and the surrounding areas in Michigan.
Other Methods Of Debt Relief Could Seriously Impact Your Taxes
Many organizations offer help negotiating with mortgage lenders to overcome debt. However, these organizations rarely explain the tax implications. Their clients are often shocked when tax time rolls around. Be aware that an improperly handled mortgage loan modification or lender-mediated short sale could create a tax liability.
The Mortgage Debt Relief Act of 2007 does provide tax relief for those who go through the program to obtain certain types of loan modifications. This is a complicated program, and care needs to be taken to ensure that its rules are precisely complied with in order to qualify for the tax relief.
Contact Experienced Attorneys To Guide You Through Bankruptcy
You can be confident that tax issues related to bankruptcy and debt relief will be properly addressed when you have an experienced attorney at Marrs & Terry, PLLC review your situation. We are thorough because we want to help you reach a financial future you can be happy with. Contact us online or call toll free at 734-663-0555.
Second opinions are available to those who have been told by other lawyers that they do not qualify for bankruptcy. We want to make certain you are not missing a debt relief opportunity.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.