Income Tax after a Short Sale?

I could not afford the rental property I purchased when I was making more money and was advised to short sell the property, after I short sold the property I received a 1099 from the lender and had to include the amount I was forgiven as income on my 2008 tax return and because of my decrease in income, could not pay the taxes and now I owe income taxes. Help.

This is a good question, and one we are asked very often. Now, let’s look at that income tax debt caused by a short sale. (Had our blogger simply surrendered the rental through a bankruptcy our blogger would not have incurred the income tax debt.)

Income tax is a priority debt that may or may not be forgiven in bankruptcy. The factors determining whether it will be forgiven are (1) what tax year the debt was incurred, (2) the date the tax return was filed and (3) whether the tax has been assessed. Our blogger will need to request a tax transcript from the government entity the taxes are due to, to make an accurate assessment, but generally if the taxes were due for the tax year 2005 or before, there is a high likelihood this debt will be forgiven.

Our blogger’s tax debt if from the tax year 2008 and will survive a Bankruptcy. Our blogger can file a Chapter 7, if our blogger qualifies, or a Chapter 13.

The good news about paying tax debt through a Chapter 13 bankruptcy is that the amount of the tax debt is determined at the date the petition is filed, no interest will be paid, unless the government tax entity has filed a lien against our bloggers property. As long as our blogger successfully completes the Chapter 13 Bankruptcy our blogger will be out from under that tax debt completely.

If our blogger qualified for a Chapter 7 but elects to file a Chapter 13 then our blogger could be free from this priority debt in as little as three (3) years. If our blogger qualified for a Chapter 13 only, then our blogger would qualify for a five (5) year Chapter 13. If our blogger qualifies for and files a Chapter 7, the tax debt will survive the bankruptcy. Our blogger may enter an agreement to pay the tax debt in installments with the government tax entity outside of bankruptcy, but the downside of that installment plan is that interest continues to accrue until the tax debt is paid in full.

Want to learn more about bankruptcy? Are you facing income tax from a short sale? The Stone Haven Law Group offers a free telephonic consultation to discuss you situation and the “fresh start” of Bankruptcy. Please call Stone Haven Law Group at (909) 457-8200 to discuss your options.

Bankruptcy Can Avoid Foreclosure

In the course to avoid foreclosures, Bankruptcy can be the most reliable option today especially to many homeowners who face foreclosure. Filing bankruptcy will put the entire foreclosure process on hold, which is very important for homeowners in the present scenario when economy is facing recession and they are getting affected by it. But there are many questions to be answered in this regard without which it is risk to declare bankruptcy. The questions that haunt our mind are “How long the foreclosure process is stopped for?” and “What is the particular chapter of bankruptcy that a debtor requires to file?”

A Chapter 7 bankruptcy, also referred to as “liquidation,” completely eliminates all of a debtor’s legal liability to pay unsecured debt. If a Chapter 7 debtor is facing foreclosure, the bankruptcy will temporarily halt the foreclosure process until one of the following occurs: the bankruptcy process is completed, or the foreclosing lender gets the judge to lift the automatic stay.  Unfortunately, if a borrower is far behind in their payments, and they do not have enough income to make the payments if the debt is reaffirmed, this relief can be granted immediately.

A Chapter 13, on the other hand, can stop a foreclosure proceeding permanently.  A Chapter 13 bankruptcy consolidates debt and reorganizes it into an affordable monthly payment plan approved by the court. In comparison to Chapter 7 bankruptcy, Chapter 13 does not completely eliminate a debtor’s unsecured debt and requires a debtor to repay a portion of or all of the debt. However, the debtor is able to pay off their debt in affordable monthly payments over a period of three to five years, as determined by the court depending on monthly income, expenses, and assets.

Chapter 13 bankruptcy, also referred to as “reorganization”, consolidates debt and reorganizes it into an affordable monthly payment plan approved by the court. But there are quite a few things to remember on the part of the debtor. One very important thing to remember about Chapter 13 bankruptcy is that you must be working or have a consistent source of income for your repayment plan to be approved by the court. It is a temporary fix and if you have no way of paying your mortgage or it will be very difficult, then maybe this is not an option for you to choose. However, it should be used as a last resort due to its limiting protections for homeowners with a first mortgage and the long lasting consequences to your credit.

Bankruptcy may be the best solution for a lot of extreme financial hardships but bankruptcy may stop the foreclosure any time prior to the sale, and allow you to repay your mortgage arrears through your Chapter 13 bankruptcy. To conclude off it could be well stated that Bankrupty is a very serious step, with enduring consequences, but can provide debtors relief from the foreclosure process.