If circumstances are forcing you into a position where you’re thinking about a bankruptcy, and you own a home, it’s important that you speak with us. We’ll want you to get a grasp on this complicated area of bankruptcy law. Our knowledgeable and experienced Los Angeles Bankruptcy Lawyers have helped countless people to extricate themselves from crushing debts.

Calling us, contacting us online or meeting us in person might be your first step to a new future.

Are you taxed for charged off debt in bankruptcy?

As tax season approaches, many Californians are wonder if they have to pay taxes on debts that have been charged off or forgiven by creditors.

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Debt that is charged off or forgiven can be considered taxable income. This can come as quite a shock to people who are struggling to pay their bills.

When a credit company or mortgage lender charges off or forgives debt that is owed, the borrower gets sent a 1099-C tax form from the creditor. In such a situation, the amount charged off or forgiven can be reported as taxable income to the borrower. The IRS has projected that creditors will send taxpayers 6.4 million 1099-C forms in 2012 which is up from 3.9 million in 2010, an increase of over 64 percent.

The good news is that borrowers who receive the 1099-C form from their creditors do not have to pay taxes on the amount in question if they can prove that the debt was discharged in bankruptcy. Another way to avoid tax liability is if the borrower can show that he or she was insolvent when the debt was cancelled. Insolvency can generally be shown when a person’s liabilities or debt exceeds their assets.

The provisions enacted in the Mortgage Debt Relief Act of 2007 generally allow borrowers to avoid taxation by the IRS on debt reduced through loan modifications, as well as mortgage debt forgiven in connection with a foreclosure or short sale if the property in question is the borrower’s primary residence. However, these provisions are set to expire after this year and must be renewed by legislators to remain in effect in future years.

One thing that is clear is that borrowers have the ability to avoid having to pay taxes on charged off/forgiven debt when they discharge such debt in chapter 7 bankruptcy or chapter 13 bankruptcy. This is another example of how bankruptcy can help give people a fresh start.

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