Bankruptcy, Tax Implications, and 'Feasibility'

June 29, 2010 - PRLog -- Most people do not know that there can be a tax implication when debt is forgiven by a creditor. Many debtors will attempt to reach an agreement with their creditors to only pay back a portion of the debt owed. The debt that is “forgiven,” or written off, then becomes income to the Debtor in the eyes of the IRS. The Debtor must then pay taxes on that “income.”

One of the benefits of bankruptcy is the debt is discharged with no tax implications. The law specifies that a discharged debt cannot be collected, and that inludes being collected by the IRS. Another common scenario is when a house if foreclosed on, and the Debtor is upside down on the mortgage. There is usually a deficiency that remains. That deficiency is also considered income and must be claimed as such under the Tax Laws. This can then cause many people to owe the IRS money, which in most instances, would not be a dischargeable debt.

The best thing for a Debtor to do in that situation would be to file either a Chapter 7 or Chapter 13 bankruptcy and have the debt discharged instead of reported to the IRS as income.

What is feasibility? Feasibility is your inability to make your trustee payments. This decision is made by the trustee who assesses your income and expenses.

How do you overcome this? It is a difficult thing to overcome if you are not generating additional income. If, at the time of filing, a spouse was not working and now they are, then it may be a simple thing to overcome and show the trustee that you are able to make the payments. In some cases it may be impossible. You may have to reconsider your situation. You may need to consider looking for a room-mate, or possibly letting something go, both of which will help lower your trustee payments.

If you have any concerns that about an objection that arises from the trustee, get with your attorney immediately to see what actions need to be taken to resolve the objection.

For more information visit http://www.bankrupcy-alternative.com/after-foreclosure.html or call us directly. Here is another bankruptcy article http://www.prlog.org/10766445-bankruptcy-adding-irs-debt-... for your reading enjoyment.

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