FORGIVENESS OF DEBT - OFTEN COMES WITH A PRICE

In a different world,  issues like the "taxation of forgiven debt", would never cross the mind.  In our world, with the current tax code and the state of the real estate market, forgiveness and taxation discussions are rampant.

This entry is just a quick note about why it may be important to file a bankruptcy case sooner rather than later if you are about to lose a home. 

As many are aware and has been written about here recently, when a mortgage lender formally forgives the deficiency balance on a foreclosed home it has the right and indeed it is required to issue a 1099 form.  This form shows the IRS the amount of the debt that was owed by the recent homeowner and how much was forgiven. 

Under current IRS rules, that forgiven debt is income to the foreclosed upon, and must be reported on the tax return as such, unless the taxpayer is insolvent OR (the point here) he or she filed bankruptcy before the debt was forgiven.

Legal reasoning for this exception aside, if you are losing your home, short selling etc. and you expect a deficiency and a forgiveness, and you have other debt that is causing you to consider a bankruptcy, you will want to consider it sooner rather than later in order to avoid the tax.