Debt Forgiveness, Form 1099-C and Bankruptcy; You May Have Options to Legally Avoid Tax

Persons who are able to negotiate debts and have them forgiven or reduced are often surprised to find that the IRS considers forgiveness of debt to be income, and therefore taxable. In this circumstance, where the amount cancelled is $600 or more, the creditor will send the debtor and the IRS a copy of form 1099-C. The taxpayer will then report this as “other income” on line 21 of Form 1040 when they file their federal income tax return.

But, not all cancelled debt is subject to taxation, though many taxpayers don’t know this fact. If you are “insolvent” according to IRS rules, you may legally avoid paying tax on the forgiven debt.

In order to take advantage of the insolvency exemption, however, taxpayers must fill out and attach IRS Form 982 along with the 1099-C to their federal income tax return. See also IRS publication number 4681, where you will find a worksheet to help calculate whether you were in fact insolvent when (in the tax year) when the debt was cancelled. More good news, for several years, you may be able to amend your return to claim insolvency for a prior year. Determining insolvency in this context can be complex and if the amounts involved are significant, finding an accountant is probably wise.

In a bankruptcy, cancelled debt is of course not taxable for that year, you are by definition insolvent for the purpose of paying income tax on discharged debt. Persons who get their debt eliminated by way of bankruptcy in Colorado generally do not have to worry about paying taxes on those amounts. Moreover, if you negotiate a debt down and then file bankruptcy in that year, you will also likely not have a tax problem. Sometimes, the creditor will write the debt off on their own, and send you the 1099. Seek professional advice in these circumstances.

It is estimated that only about 1 in 10 people who receive 1099s file the accompanying application for the insolvency exception. This is true even though roughly half of these taxpayers would qualify. In my practice I try very hard to inform clients of these issues, and the effect of filing bankruptcy or settling debt.

A Colorado bankruptcy lawyer should take a holistic approach to clients’ situations and debt. The goal is to get to the other side with as little debt as possible, and with a fresh start. I do attempt this with each and every client. I meet my clients, personally, and work with them for a “global” solution that makes sense. If you think I could help your family, please call (303) 670-4242 for a free consultation.

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New, Increased Filing Fees For Bankruptcy in Colorado

adfixedgreenPeriodically the filing fees in U.S. federal and state courts in Colorado change. The District of Colorado Bankruptcy Court will be increasing its fees for filing and general services. The new rates took effect June 1, 2014. 

Some of the more common filing fees are now as follows for common types of cases/ issues: Chapter 7 bankruptcy in Colorado $335, Chapter 13 Bankruptcy in Colorado $ 310, Chapter 11 $1717, filing an adversary proceeding $350, filing an amendment to add creditors $30, and a motion to reopen a Chapter 7 bankruptcy in Colorado now costs $260 to file.

Preparation is the key to success in any legal matter, and meeting with your bankruptcy lawyer as soon as possible to determine the appropriate chapter of the Bankruptcy Code to use, and which fee(s) will apply, will help your case go smoothly right from the beginning. Though I welcome emergency filings, coming up with a good deal of money to get the case filed, in a short amount of time, just adds to the stress Debtors are facing. If you feel a bankruptcy may be necessary, call for an initial free consultation and I will discuss the fees and costs with you at the outset so you can plan ahead. Unlike many things in life, filing fees and legal fees paid to remove debt, have a certain guaranteed return. I can help. – Robert Gauss, Esq. (303) 501-4018.

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Choosing A Bankruptcy Lawyer.

If you’re considering bankruptcy in the Denver area you have plenty of choices when it comes to a lawyer. I urge you to meet with at least two bankruptcy lawyers before you make a decision. Lawyers, and bankruptcy lawyers in particular, come with different levels of experience and attitudes toward the practice of bankruptcy law. Bankruptcy law is a place where the business of law meets the profession of law squarely. Some bankruptcy lawyers are in essence running a discount bankruptcy petition mill, where quality suffers. This can end up costing you more than you saved by hiring these clowns in the first instance. Filing a bankruptcy will effect your entire financial future and therefore you should take the time to choose a bankruptcy lawyer wisely.

Price, while important, should NOT be your primary focus. A bankruptcy lawyer who takes time with clients and is interested in providing the best possible outcome in all aspects of your bankruptcy will need to charge you for that service. A bankruptcy lawyer who is simply interested in filing as many cases as possible will not take as much, if any, time with you and instead will rely on time saving and cost cutting procedures which are not in your best interest. If you’re looking at getting rid of 20, 30, 40 or 100 thousand dollars of debt, does it really matter much if a decent lawyer is $200 more?

A professional, experienced bankruptcy lawyer will have a decent reputation with the bankruptcy judges and trustees. I have developed, I hope, a solid reputation with these people and because they know I do things correctly, my cases tend to go smoothly. In your bankruptcy matter, do you really want the person representing you to have ten other cases that day? Do you want them to be the subject of disciplinary investigations with the State Bar or with the Bankruptcy Court? Do you want them to quote you $500 on the phone only to find out it’s more when you get to their office?

The solution to all of this is simply to shop around, and not for a $100 price difference with the fee, when considering bankruptcy. Ask around about a person’s reputation, read about that person on the internet, and most importantly take the time to go to a free consultation or three before deciding. Decent bankruptcy lawyers will meet with you, discuss the entire case before setting a fee, and be happy to answer whatever questions you may have. Someone interested primarily in the business of law, will rely on staff to “sign you up,” will happily quote a low fee and will generally not have much time for you and your bankruptcy questions.

All that said, I completely understand that going broke is expensive, as it were, and I can help you for a reasonable, professional fee that makes sense and will save you money in the long run. Come see why. Happy New Year Colorado, we’re going to do great things this year !!

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