Filing for bankruptcy is frightening enough without having to worry about being required to pay income taxes on your debt. Here’s what you need to know about two situations that could potentially cause you to incur these types of penalties, and what you can do to avoid it.
1. Settling Your Debt With Creditors
Many debt relief agencies make promises that they can help you settle your debts with your creditors, allowing you to pay much less than you owe and getting the debt off of your credit report without filing for bankruptcy. However, there are a few caveats here that many debt relief agencies neglect to mention.
Any portion of your debt that you do not pay will be considered a “charge-off,” which will be reported to the Internal Revenue Service (IRS). At that point, you will owe income tax on the portion of debt that was charged off. Depending on the size of the original debt, you may only owe a few dollars in income tax, or you may owe hundreds or even thousands.
Additionally, a charge-off will show up on your credit report. Many people assume that settling a debt with a creditor will have a positive impact on their credit, but the truth is, the impact is far from significant. Often, having a debt reported as a charge-off will do less to raise an individual’s credit score over time than having the debts discharged in a bankruptcy would.
2. Short Selling Property Other Than Your Primary Residence
If you are trying to avoid declaring bankruptcy by short selling your property, you may incur additional costs in income taxes. During a short sale, your property will be sold for less than what you owe on the mortgage, and your mortgage company will forgive the difference. However, the scenario is the same as above. The amount of debt that was forgiven is reported to the IRS, and you will be required to pay income taxes on it.
Often, filing bankruptcy can help you have your mortgage debt discharged altogether, allowing you to avoid paying income tax penalties.
When to Contact a Bankruptcy Attorney
If you are struggling with meeting your financial obligations, don’t hesitate to speak with an experienced bankruptcy attorney. Filing for bankruptcy is preferable to the alternatives, and a bankruptcy attorney can help you determine which path is right for you.
Contact the Law Firm of D.C. Higginbotham today to get the guidance and assistance you need to overcome your financial difficulties. Call now for a consultation to discuss your situation in detail at (904) 354-6604. We are available now to assist you.