BANKRUPTCY ARTICLES

CAN YOU RECOVER FROM BANKRUPTCY & FORECLOSURE?
Former homeowners who have been foreclosed on have to go through an entire year of loss after loss. First, they lose their home and have to relocate. Next, they have to figure out how to re-establish credit because they have lost their once good credit rating. 

Then, as homeowners attempt to put this behind them, they go to the mailbox and receive a 1099. A 1099a or 1099c is issued by the creditor for the abandonment or cancellation of debt. What that means is that they will report any amount that you were not forgiven as income to the IRS. WOW! The homeowner assumed that this nightmare was over but now they encounter this tax issue on top of everything else. As if it is not bad enough to have a foreclosure on your credit – you now may have the IRS coming after you for this “income” due to the debt forgiveness.

Was it really an “income”? What is “debt forgiveness”? What does this “1099” mean? Some lenders are required to give you a 1099 after a foreclosure auction or even a short sale. This means that the lender was unable to collect the full amount of the debt and therefore you are picking up the tab for the difference. You are now going to get this 1099a/c, which is reported to the IRS. This 1099 states that you were forgiven a certain dollar amount and now you are reporting it as income. The forgiveness part comes into effect where the lender says, “I was so gracious that I forgave you of what you owe me. But here’s the bill for my forgiveness.” As we all know, the IRS is a force to be reckoned with. The IRS is going to get what is theirs, whether we like it or not.

Bankruptcy may be an alternative for a homeowner who has lost their home or an investment property. The bankruptcy laws are designed to help the consumer with these types of issues. However, even if you file bankruptcy you may not be able to get rid of some of the 1099 liability. Of course that depends on how quickly you act after your foreclosure action, and how long you waited to file for your bankruptcy. Bankruptcy may be able to get rid of multiple 1099 liabilities. However, bankruptcy is not for everyone and there may be other alternatives available to the consumer to address these issues. The lender focuses solely on their loss and their gain and may be inappropriately reporting a dollar amount on your behalf. You should be aware of what your options are in order to assert your legal rights against the creditor. In bankruptcy, if the debt has been discharged the creditor is not supposed to issue you a 1099. However, of course, that does not stop them from doing it. I encounter this issue frequently with my clients and it is something that must be addressed.

It is important for you, as a homeowner, who has received a 1099 from a foreclosure action, or even a short sale, to see their tax professional. There may be laws that protect the homeowner from enforcement of this “income.” However, that does not mean that the situation is resolved. Sometimes you are able to get rid of the tax liability but the lender has up to 5 years to come after a homeowner for the deficiency. What that means is that the lender has up to 5 years to decide if they are going to sue you for the amount they failed to collect through the auction or short sale. This is still an issue that has become more of a concern in the recent months and is very much a possibility. As an attorney, it is my personal belief that consumers know their legal rights and how to address them. In the end, the goal is to protect yourself from your creditors. 


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BANKRUPTCY IS NOT ALWAYS AN ESCAPE FROM PAYING TAXES 
One of the most common misconceptions when it comes to bankruptcy is that tax liability is never dischargeable in a bankruptcy. Never is a strong word and like most rules in life there is always an exception.

Most people considering bankruptcies are not aware of this exception and simply do not address the tax liability with their attorney. Not addressing this issue could prove to be detrimental to your case. When discussing these issues with your attorney you must fully disclose all information. An attorney is much like that of a doctor, if you do not tell your doctor what symptoms you are having then how can the doctor properly treat your ailment. As an attorney we need to know the facts, we need to know the issues and we need to know your concerns. Without the basic information, an attorney cannot fully address all your concerns.

Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. If you are trying to file bankruptcy simply for tax liability you should consider the qualifying factors that are laid out under the bankruptcy law.

The first rule that must be met is if the due date for filing a tax return is at least three years ago. This means that the tax return was suppose to be filed at least three years prior to the filing of the bankruptcy. That date is very important to start the countdown as to whether or not it qualifies. That deadline also includes any extensions filed for that specific year.

The second rule is if the tax return was filed at least two years ago. Meaning that the taxpayer had to have filed that tax return at least two years prior to filing bankruptcy.

The third rule is if the tax assessment is at least 240 day old. The IRS must assess the tax at least 240 days before the taxpayer files for bankruptcy. The IRS assessment may arise from a self-reported balance due, an IRS final determination in an audit, or an IRS proposed assessment, which has become final.

The fourth rule is that the tax return must not be fraudulent. The tax return cannot be fraudulent or frivolous. Every once and a while we run into a taxpayer who like to create tales of fiction more than facts. Provided that that is not the case then you may qualify.
Finally, the fifth rule is that the taxpayer is not guilty of tax evasion. The taxpayer cannot be guilty of any intentional act of evading the tax laws. In other words, you must have filed your tax return. It is a pretty simply concept if you want to get the benefit of having the debt discharged then you must have filed the tax return.

Depending on the Chapter of bankruptcy you file the manner in which the court treats it may be different. A Chapter 7 provides for full discharge of allowable debts. Chapter 13 provides a payment plan to repay some debts, with the remainder of debts discharged. Under the new bankruptcy laws, tax debts are treated the same way in both Chapter 7 and Chapter 13 petitions. Not all tax debts are capable of being discharged in bankruptcy. The bankruptcy petitioner must have tax debts that meet the criteria above mentioned for discharge.

Simply because the tax debt meets the criteria of what the law requires does not automatically mean that your debt can be discharged. You should seek the advice from a bankruptcy attorney who can provide more insight to you.  


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