When you borrow money, either secured or unsecured, you have an obligation to pay that money back, so borrowing money is not a taxable event. If you don’t pay back the money, and the Creditor forgives all or part of your debt, that is a taxable event. Most recently, a client whose home was foreclosed advised that her lender had sent her a Form 1099-C, showing the amount of debt forgiven as the difference between the loan, and what the property sold for at the Sheriffs sale. Since the 1099-C was for tax year 2009 and her Bankruptcy filing was in 2010, the debt was no longer dischargeable through bankruptcy. Fortunately, I was able to advise her about the “Mortgage Forgiveness Debt Relief Act” and she was able to avoid additional tax liability by filing a Form 982 with her tax return. This raises two important points, First, if you are considering filing for Bankruptcy solely to avoid tax for debt forgiveness due to a foreclosure, you may be able to avoid the tax by filing Form 982. As of this date, the Act includes debt forgiven in calendar years 2007 through 2012. Secondly, if you have been taxed and were not aware of the act, you should see your accountant about filing an amended return. Also, keep in mind that this act does not cover debt forgiven on a credit card, or other loan. If you have any concerns you may wish to contact the IRS help line, or check their web site. The relevant forms are available on line.
