With the recession in full swing, there have been a number of stories about people overloaded with credit cards and what happens to them. When many people are overwhelmed by debt, most will try to reduce debt by negotiating their credit card balance. Another form of debt reduction is hiring a debt consolidation company to negotiate unsecured debt with easy payment. While all of these forms of debt elimination seem too good to be true, in many cases they are. Another problem facing Americans since the housing crisis is foreclosure. Real estate prices continue to drop and most people owe more than the house is worth. Short selling is an option, but in today’s market it doesn’t always work. Many people just walk from their homes when facing foreclosure. The problem that arises is when the bank liquidates the house, there is a deficit of what is owed. Who is responsible for this? If the individual filed for bankruptcy, this would eliminate the deficiency on the bankruptcy filing. If they don’t, creditors have been sending an IRS 1099C to debtors and will have to file it as income.
Filing for bankruptcy is the easiest way to remove this phantom income from your taxes. If you file for bankruptcy and receive a 1099C, you must file IRS Form 982 to show that the income is no longer subject to tax. It’s relatively simple when it comes to debts being discharged in bankruptcy. If you do not file bankruptcy, you will be responsible for paying taxes on the entire amount. If you’re losing your home to foreclosure and can’t pay off your credit cards, it would be common sense to think there’s no way you can pay taxes on a home deficiency or credit card debt reduction. .
When it comes to this situation, Chapter 7 bankruptcy is king. Many people feel that they are doing the right thing by paying off some of the debt. It sounds like a great idea, but when the credit card company turns around and sticks you with a 1099C for the canceled amount, you’ll start singing a new tune. Talking to a bankruptcy attorney before you get involved in negotiations with your creditors can be enlightening. If you are a person who has a large amount of unsecured debt and qualifies for Chapter 7 bankruptcy, you can eliminate the entire amount along with the liability that comes with it. When creditors are negotiating with you, they try to act as if they are your friends, but the veil is removed as soon as you send them your hard-earned money.
If you are in the position of losing your home to foreclosure, another option is to file Chapter 13. If you make enough money and want to pay off your debts, Chapter 13 bankruptcy allows you to negotiate a payment plan with your creditors that will last. 3 to 5 years. This will allow you to catch up on missed payments and keep your home. Both types of bankruptcy include an automatic stay, which will stop all collection activity, including foreclosure, against the debtor. Always consult a bankruptcy attorney to help you make a decision about filing for bankruptcy.