You may be aware that when a creditor forgives a debt of yours that’s greater than $600, then it must send you IRS Form 1099-C to provide evidence to the IRS that it cancelled your debt. This can be quite surprising to former Las Vegas debtors in various situations because it means that the debt problem they thought was resolved in their favor comes with a price. In some situations this can be quite hefty.
Here are seven things you need to know about the form.
- Most Las Vegas homeowners will receive it when their bank cancels a deficiency on their mortgages. This can occur after a Las Vegas short sale or deed in lieu of foreclosure plan.
- A less common but more precarious situation is when people have debt forgiven during a debt management or debt settlement scheme. It often throws a wrench into the plan and forces the debtor into bankruptcy, which is one more reason to avoid them altogether.
- Even if you do not receive the 1099-C form, you must still declare the income.
- Banks cannot and should not send you a 1099-C form for debts cancelled in bankruptcy. If it does contact your bankruptcy attorney.
- Bankruptcy is a complete defense to the income you received as a cancelled debt. This means that if you filed bankruptcy before the creditor forgave the debt, then you will not need to pay income tax on the forgiveness. However, if you file bankruptcy after receiving the form, you will have to declare the forgiveness as income. Again, this is why you should skip debt settlement and go straight to bankruptcy.
- The IRS allows people to claim an insolvency exception, which is an IRS term, not a bankruptcy one. The IRS will allow you to claim this exception if your debts are greater than or equal to the fair market value of your assets at the time the loan is forgiven.
- Third, the Mortgage Forgiveness Act of 2007 allows people whose mortgage debt on their principal residences is reduced through restructuring or forgiven via foreclosure to claim an exception. Here is what the IRS has to say about it.
Forgiven debt can cause quite a hassle for Las Vegas residents. It’s important to discuss any financial problems with your bankruptcy attorney before any debts are forgiven.
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. Call 702-880-5554 for more information.