4 Steps to Ensuring You Don’t Pay Income Tax on Discharged Debt

Once people obtain a discharge in a Las Vegas bankruptcy, that’s the end of the case. Former debtors breathe a sigh of relief, and they get started on their fresh start. Sometimes though, creditors, usually accidentally, claim that the loans you discharged are actually forgiven instead, and the IRS comes calling, claiming that you owe it income tax. What does this mean?

If a creditor forgives a loan with a value greater than $600, it is required to notify the IRS that you received that forgiveness as income. In some circumstances, the amount can be alarmingly substantial. For example, in the past we talked about forgiven deficiencies on mortgage debt in a short sale or deed in lieu type of situation. Alternatively, and this won’t be a problem for a while, people whose student loans are in the federal government’s Income-Based Repayment program (IBR) will have their loans canceled in 25 years (20 for loans issued after 2014). By law, forgiven student debt on IBR is income, and almost everyone whose loans haven’t been amortized in 25 years will owe a large amount.

This circumstance is similar, but instead, the bank has decided that the loan the bankruptcy court declared unenforceable is actually a forgiven loan, and it has sent you the dreaded 1099C form to prove it. What do you do?

(1)  Do not panic. This is not zombie debt.

(2)  Contact the bank to see if it will correct the mistake. This may take more time than step 3, but you might want the bank to acknowledge that it did something wrong.

(3)  Submit IRS Form 982 [http://www.irs.gov/pub/irs-pdf/f982.pdf] to the IRS with the rest of your income tax return. Form 982’s title explains its purpose, “Reduction of Tax Attributes Due to Discharge of Indebtedness.”

(4)  Simply check box 1A, fill in the amount that was discharged in line 2, and complete the rest of the form as necessary.

These simple steps help you avoid paying taxes on your discharged debt.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation by calling 702-880-5554.

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