Bankruptcy

1099-C and Debt Forgiveness

1099-C

Bankruptcy is a powerful tool.  The law is written in such a way to relieve that maximum amount of burden from the debtor while also being fair to creditors.  One of the most powerful tools in the bankruptcy code is 26 U.S. Code § 108. This part of the code says that all debt discharged in bankruptcy is tax free, even if you get a 1099-C from the creditor.  The bottom line is this…

Debt discharged in bankruptcy is not taxable.

1099-C

The way our tax code is written prioritizes forgiven debt as income.  If a creditor forgives your debt, they are supposed to send you a 1099-C reporting the forgiven debt as income, which is taxable.  

Some examples of debts that get cancelled:

  • a short sale;
  • compromising a debt
  • lender compliance the federal government;
  • Debts included in a bankruptcy; or
  • Mortgages in a foreclosure.

Lenders are more or less bound to send a 1099-C when they do something that could be considered cancelling a debt.  One thing to remember is, they aren’t tax professionals and they don’t know for sure if the event was even taxable.  They just report the transaction to the IRS.  

The 1099-C you get is not the final word. Just a report that the IRS has been notified. 

The Exceptions

Under the law, debt that is cancelled is treated as though you received that much money in cash and that “franken-cash” you “got” is then taxable as income according to the IRS. 

The exception to that rule is found in the aforementioned federal statute.  Under that statute, the IRS may not recognize that as income under two situations, 

  1. The person who owed the debt was insolvent at the time the debt was forgiven, or
  2. The discharge of the debt occurred as a result of a bankruptcy case. 

 

Rebutting the 1099-C

To avoid the 1099-C you will have to file a form with the IRS.  That form will exclude the forgiven debts from the 1099-C from your income.  The form is simple and I provide a link to it here

In the form, the first exceptions is as follows: 

Discharge of indebtedness in a title 11 case

That sounds complicated but Title 11 is where the bankruptcy code is found.  This is your way out of the 1099-C if you completed your bankruptcy. 

Insolvency

Chances are, if you’re insolvent you should be filing bankruptcy, but that’s the topic of a different blog post.  If you’re insolvent at the time a debt is forgiven you are also able to exclude the 1099-C debt from your income.  This just takes a little more work. 

The form includes a worksheet to see if you actually are insolvent according to the definition laid out by the law.  You fill out the worksheet and then you have your answer. 

Additionally, if you don’t have personal liability for the debt then the forgiveness of that debt does not constitute a taxable event.  It’s like the debt never even happened.   

If you’re in trouble and need help figuring out what to make of your individual situation, call us.  We’ve helped thousands of people work through their debts and come out with a fresh start.  

Straight to Jail

Jail

What would you do if you found out there was an arrest warrant out for you because you hadn’t paid your bills? Would you go around and borrow money from family and friends? Pack your bags and skip town? Change your name and head to France? Laugh?

If you said laugh, you’re correct.  In the United States we don’t arrest people for owing money you don’t have. 

There are scammers out there that are banking on the fact that you didn’t pay attention in Civics.  They’ll call you or email you, maybe even send something over in the mail.  

You’ve heard the calls and they all go something like this: “You have arrest warrant. Call this number now to avoid arrest by authorities. Court case filed in your name soon. Agent Bill William, Federal Department Revenue Service.”

As laughable as this is, it’s just another scam…and somehow it works.  

Preying on the vulnerable

If it didn’t work, they wouldn’t keep doing it.  This scam works because it preys on the emotions people have when they can’t pay their legitimate bills.  

These pieces of human garbage want to exploit you and your emotions to try to squeeze as much cash out of you as possible.  It’s a scare tactic and it works.  

That money isn’t going to your actual creditors, it’s going to end up in the pocket of some scammer in a rogue country. 

When can you go to jail?

There are some situations that can cause you to be arrested and go to jail for your debts.  Blatant refusals to pay child or spousal support ordered by a court can sometimes land you in jail.  Occasionally, a creditor can sue you and get a subpoena to make you show up in court.  If you defy that subpoena, you can sometimes be arrested, but not for failure to pay.  

Get “scam immunity”

If you’re in a bad enough place financially that the thought of getting arrested over your debts is keeping you up at night, you need to seek professional help.  That’s where we come in.  

Bankruptcy was a system created to eliminate debts, legally.  We have filed thousands of cases and eliminated nearly hundreds of millions of dollars in debt for our clients.  

Our website has countless articles about collection rights and we offer free consultations to discuss how bankruptcy can help you become free of the burden of debt.  We’re here to help when you need it most.  

But, just in case we need to say it again, don’t send your money to Agent Bill William.  The Federal Department Revenue Service isn’t coming to put your in jail. 

Emotional Barriers to Bankruptcy

Rock Bottom

Generally speaking, debt evokes strong emotions.  Those strong emotions often keep people from filing bankruptcy.  While these emotions are understandable, they shouldn’t be the reason why people keep slogging through years of debt related stress long after they should have sought help. The barriers we must overcome are:

Fear

Hardheadedness

Pride

These three emotional barriers keep people stuck in the cycle of debt.  

Fear

It’s the unknown.  While this kind of fear probably kept our primitive predecessors alive, today, there’s no excuse for not being informed.  

People are scared that they may not be able to access credit, they fear being viewed as a failure, they fear that somehow, others will judge them. Those things keep people on the sidelines and stop them from seeking the help they so desperately need.

Some of this fear is irrational but most of it stems from heaps of band information.  Some of this bad information is just a misunderstanding but a lot of it is deliberately spread by people who profit from your fear. Unscrupulous creditors seeking to keep you out of bankruptcy so they can squeeze just a few more bucks out of you before you seek the help you deserve. 

In the end, fear of bankruptcy is understandable. However, I’m going with FDR’s thought.  All we have to fear is fear itself. 

Hardheadedness

Hardheadedness is a trait that you really have to appreciate.  It causes people to finish the race, to follow through, to succeed against the odds.  It’s a virtue. Sometimes though, hardheadedness keeps you from seeking the assistance you need. 

You say to yourself, “I created this mess for myself, now I am the only one who can get out of it.” While that feeling may be honorable, it isn’t always logical. 

You’ll keep trying to chip away at the mountain of debt you’ve gotten yourself in and you’ll end up neglecting the things you need to focus on.  You’ll forego a real and important need that can make your life better and more fulfilling.  Often people skip medical treatments, let their mental health suffer and they’ll often neglect the biggest thing you can do to improve your life…save for retirement. 

Pride

 “I can pay my debts.  I’m not the kind of person who files bankruptcy.”

I hear that garbage all the time and I want to scream. 

Well, who files bankruptcy anyways?

A lot of times it’s people you know. People just like you. People who have gotten sick, people who have lost their job or seen a decline in income, people who got sucked in by the flashy and expensive world we live in. 

You don’t file bankruptcy because you’re immoral.  It’s a legal solution that fixes an economic problem.  After all, not having enough money isn’t a crime. Even Jesus associated with people who couldn’t afford the trappings of life. 

Look at the people who have filed bankruptcy.  Former Presidents, major corporations, even Walt Disney.  Do we look at people or companies in a lesser light just for asking for help to start over?

For far too many people, it takes hitting rock bottom to get over the emotional barriers:  when these irrational emotions are finally whittled away, rationality wins out and people seek the help they truly need. 

If you need help, don’t wait.  Call us today. We can get you the help you deserve. 

Unfiled Taxes: A Life Sentence

Unfiled Taxes

We have a long and unpleasant relationship with taxes in this country.  We literally fought the most powerful country on earth over a few pennies tax on some tea and paper.  In life though, there are two certainties.  You will die and you will definitely pay taxes. The longer you wait to handle this reality, the longer you wait to get relief.  Unfiled taxes are a life sentence.  

Tax debt can be overwhelming and unfiled taxes just make it worse.  This is especially true if you happen to have something go wrong with your job or your business.  People hold off filing their taxes for a number of reasons and at the time, many of them seem to make perfect sense.  There is a problem with that though and it can be very costly.  

Bankruptcy can discharge many kinds of old tax debt.  It’s one of the best tools you can use to combat the IRS and their seemingly unlimited desire to squeeze every penny out of you that they can.  But there’s a catch.  You have to file your tax returns.  

Unfiled tax returns turn your ability to discharge those old debts upside down.  Below, I’ll outline two different scenarios that I’ve dealt with in the last month.

Filed, On time tax returns

My first client came to see me.  He owed $91,500 to the IRS in back taxes.  He certainly didn’t have that kind of money and he was stuck between a rock and a hard place.  But, he had filed his return on time, complete and accurate. 

The second client had a different situation.  She owed $65,000.  She also didn’t have the means to pay that, but she was in way more trouble than my first client.  She had unfiled taxes dating back nearly a decade.  

The first client I can help…today. The second client is going to have to keep treading water for two more years before I can help her.  

You’d think that the second client would be better off, but you’d be wrong.  The golden rule in bankruptcy when it comes to taxes is… you can’t discharge tax debts that you haven’t filed a return on. 

Bankruptcy eliminates some taxes

You can discharge most taxes in bankruptcy. While taxes are a big deal, if you handled your obligations correctly, your old taxes can be eliminated in bankruptcy.  You just have to file your return and let the clock start ticking.  

Even if you can’t file bankruptcy on your taxes, there is a statute of limitations on collecting taxes, but that doesn’t start until you actually file the return.  

The 2 year rule

In order to qualify for the two year rule you’ve got to adhere to the policy.  To get a tax discharged, the return must be on file with the IRS for at least 2 years before the bankruptcy case is filed.  Extensions move the starting point, so avoid them if you can.  Here’s an example:

  • If you get an extension until July 15th, that’s your start date.  Even if you ultimately file your taxes on April 21st. 
  • If you don’t get an extension and you file on June 1st, you start counting the day you filed, June 1st. 

 

Always be aware of filing dates that fall on weekends or holidays.  April 15th is typically the “last day to file without penalty” but that can change from time to time. 

Unfiled taxes

My client who hasn’t filed in a decade is in a precarious situation.  She is looking at retiring in the next 5 years.  Very few creditors can get their hands on Social Security benefits.  The IRS can. 

We have to get the clock ticking on discharging those taxes. It’s going to take a lot of leg work on the part of this client.  They’ll have to find W-2s and other income reports.  They’ll likely even have to contact the IRS for a list of reported income that they have.  However, they’ll be able to file a return.  

This will get the ball rolling, but it would have been better to do things the right way from the start.  This person would be gliding into the last few years of working, footloose and fancy free.  Instead, they’re like David, trying to hold off the biggest Goliath of them all, the IRS. 

Unfiled taxes can ruin your life.  If you’ve gotten yourself into a situation that you can’t seem to get out of without help, call us.  Let our attorneys take a look at your situation to see how we can help.  Our consultations are always free.  You literally have nothing to lose. 

When Forbearance Ends

When Forbearance Ends

Because of COVID, most lenders have offered what’s known as a mortgage forbearance.  A forbearance allows a homeowner defer payments on their mortgage for a period of time.  Currently, these programs are very popular with American homeowners and scores of them are taking advantage of the opportunity to skip payments during these uncertain times.  We have been fielding numerous questions about forbearances and they all ask, “What happens when the forbearance ends?”

As with so many questions these days, we don’t always have a clear answer to this inquiry.  A lot of that is due to the numerous different types of mortgage contracts that exist.  In an attempt to help answer this question, we will outline a number of the ways this could all play out.  

Nothing

The offer of nothing at all will be what you get from some lenders.  They’ll expect you to write a check at the end of the forbearance period for the entirety of the balance owed.  If your mortgage payment was $1,000 and your forbearance period was 5 months, they’ll expect a check for $5,000 when the forbearance period ends. While it may have been beneficial for the period to avoid the payments, it will do you no good now unless you’ve been saving your payments up during that time.  Because of this situation, we believe that some lenders will offer different terms.

Repayment plan

Some lenders will offer you an option of spreading out the forbearance amount over a period of time yet to be determined.  Many institutions are looking at a 6 month period.  That means that if you have that $5,000 deficiency, that’ll be spread out over 6 months, adding $833 a month to your $1,000 payment.  Again, while this is more helpful, most of us don’t have an extra $800 a month just laying around. 

Loan Modification

If you qualify, some lenders are saying that they will roll the missed payments onto the back end of the mortgage.  While this catches you up, you’ll also be paying extra interest as well as paying for longer than your intended term.  While this is likely the most attractive option to many who have taken advantage of a forbearance, it likely won’t help that many people because it will be a subjective process with a long application and potential credit checks before approval.  

Separate Loans

Another potential option is creating what is effectively a second mortgage. This mortgage could require payments that start at the end of the first mortgage or in addition to the first mortgage but with separate terms and interest rates.  

How do I even know?

As we stated earlier, this is just an overview of what we have seen personally, heard about and speculated about.  Again, this isn’t an exhaustive list and your mortgage company may have other options they can propose for you.  Our best advice for you is to explore every option, including bankruptcy.

What if nothing works?

That’s where we will step in.  If your lender won’t work with you or isn’t able to help you at all, we can file a Chapter 13 to force them to accept OUR terms.  If you find yourself at a dead end with your mortgage lender, call us and let us step in and fight for you.  If they won’t work with you voluntarily, we’ll make them work with you. 

The Student Loan Crisis and Bankruptcy

The United States is unique in the world in the way we handle bankruptcies.  We go to great lengths to keep both borrowers and lenders honest.  One of the flaws in our bankruptcy system is that bankruptcy can only discharge student loan debt in very extreme situations.  Generally speaking, if a lender knows that they have someone on the hook, they’ll often use that leverage to lend too much money, often at varying levels of interest.  This can cause problems in people’s finances because they often see easy, cheap money and get themselves overleveraged.  This is one of the reasons our student loan crisis has occurred. 

The reason bankruptcy is a good way to sort out the student loan debt crisis is that bankruptcy is a good way to determine those who can pay and those who can’t.  Our bankruptcy system has been functioning in its current state for more than a century and knows how to make sure that lenders and borrowers are treated fairly.  Bankruptcy is one of the most transparent systems in our entire legal process.  Cases are open, transparent and decided quickly, allowing both the debtor and the creditor access to a fair and swift process.  

The bankruptcy code already does a good job of determining who and can’t afford to pay something back and it certainly has a better grasp on the needs of the community than our elected leaders in congress. 

BANKRUPTCY KEEPS BORROWERS HONEST

Bankruptcy will always keep a borrower honest.  The hallmark of bankruptcy protection is truth.  If you seek the protection of the courts, you must tell the truth, the whole truth and nothing but the truth about your financial situation.  You must disclose ALL your income, assets and liabilities.  The court’s job is to ensure fairness.  You will always be left with enough to live a normal middle class existence in bankruptcy.  The trustee and the courts all but guarantee it. If you can afford it you can keep your car, home, household goods and even your retirement accounts.  What you can’t keep are luxuries like vacation homes, extravagant jewelry or collector cars. 

If a borrower makes more money than the typical household in their area, that borrower must file a Chapter 13 and pay back at least a portion, if not all of their debts. If they make less than the median income, they have a choice between a Chapter 7 or a Chapter 13 bankruptcy. 

BANKRUPTCY KEEPS LENDERS HONEST

This is harder for some people to understand, but indulge me.  Lenders are in the business to make money.  After all, that’s why you pay interest in a loan.  If there is a chance that a lender won’t get paid back, that lender is less likely to throw money around like a drunk sailor. If lenders know that they COULD lose their investment, lenders could ultimately be more selective about what loans they fund and the amounts that they’re willing to shell out.  

If student loans are more selective and offer less money, schools will have to lower tuition to meet the market.  Schools that don’t will dry up and die.  One of the reasons that college tuition has risen so sharply is the easy access to student loan money that has created a feeding frenzy amongst colleges looking to outdo one another and compete for your ever fatter loan check. Tuition has outpaced inflation for decades and where that money ultimately goes is lost on me. I have however seen extravagant marketing and insane amounts of construction on college campuses. It leads me to believe that there are ways to control costs at schools and if the money isn’t there to fill the coffers of colleges and universities they’ll be forced to cut back. 

Let’s be very honest.  I love my alma mater, The University of Georgia, and I want it to succeed but if students weren’t able to get their hands on so much money to begin with, tuition would cost less. Yes, some stadiums and arenas may not get built or renovated and perhaps the cafeterias would have to cut back on the gourmet meals, but students would still get a good education.  After all, doesn’t a Toyota get you to the same destination as a Lexus does, just for less money?

THE SOLUTION

If student loans were dischargeable in bankruptcy, lenders would only approve students who were going to schools that provided them good, sound education that would provide them with the opportunity to earn a solid living.  As someone who has practiced bankruptcy law for over a decade and filed thousands of cases, I often meet with people who owe tens of thousands of dollars in student loans that were taken out to attend a for profit college that didn’t lead them to any kind of gainful employment or employment advancement.

Prior to the 1990s, student loans were dischargeable in bankruptcy if a borrower had made 5 years worth of payments and met the qualifications.  I believe we need to find a common sense solution to the student loan crisis.  Americans want to pay for their education and many of them do. Having a way for those who can’t to eliminate their debts, legally, just makes good sense.