(856) 686-9910Our New Jersey Bankruptcy and Debt Relief Lawyer Explains Debt Forgiveness Income
Debt forgiveness often occurs in situations like a home short sale or when a creditor agrees to accept less than the total amount owed. This seems like a relief because you no longer owe the remaining balance. However, there's a catch that many people aren't aware of: this forgiven debt can have tax implications. When a creditor forgives part of your debt, the IRS views this forgiven amount as income. Why? Because you received funds when you borrowed and are not required to pay them all back, this effectively becomes a financial gain in the eyes of the tax authorities. As a result, the creditor will report the forgiven amount to the IRS using Form 1099-C, which is expected to be included as income on your tax return.
So, while being forgiven debt lightens your immediate financial burden, it's essential to be mindful of the potential tax liability associated with this income. It's an aspect that catches many by surprise. As a New Jersey bankruptcy and debt relief lawyer, I can help you be prepared to manage any tax implications more effectively.
Ways to Deal With Debt Forgiveness Taxes
There are two ways to deal with this. The first is to negotiate deals with creditors with the assistance of a tax professional. For example, if you offer 60% to creditors, and they all agree to take it, talk to an accountant or attorney about the estimated tax liability if the deal goes through.
It is still a good deal if you have the funds to pay the creditors and the taxes. Set the tax money aside in a separate bank account, ready to pay out when you eventually file your tax return.
The second way is to avoid the tax entirely by claiming insolvent. This makes the debt forgiveness non-taxable. If your accountant thinks this is an option, file Form 982 with your tax return. Hopefully, that will convince the IRS to waive the tax. The other way is to file for bankruptcy.
What You Can Do
If you have a significant amount of debt that you want to resolve and you want to avoid tax consequences, then bankruptcy might be a better alternative. For help deciding whether bankruptcy is a possible solution, download my free book, Am I In Too Deep? A Guide to Knowing When You Need to File Bankruptcy in NJ. You can also take the quiz to the right.
If you live in Burlington, Camden, Gloucester, Salem, or Cumberland County, are considering filing bankruptcy, and are ready to take action, then call me at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case. If you want more information about bankruptcy, download my free book, Top Questions People Ask About Filing Bankruptcy in New Jersey.
