Debt Forgiveness and Bankruptcy

This blog entry will concern the fact that forgiveness of debt is a taxable event, but that there are exceptions to this even outside of bankruptcy law. I also wish everyone a happy new year, somewhat belatedly as I’ve been very busy with a number of criminal law cases.

The IRS considers forgiveness of debt income to the debtor. In English, if you don’t have to pay what you did owe, then you have to pay tax on the amount forgiven. There are a few exceptions to this idea however. First, if you file bankruptcy to get rid of your debt you do not have to pay tax on the debt discharged.

Outside of bankruptcy, forgiveness of debt is not income if the debtor was insolvent at the time the debt was forgiven. 12 U.S.C. 108(d). Sill more exceptions outside of bankruptcy are where the lender agrees to write down the purchase price of a home where the original purchase price was inflated due to fraud or misrepresentation. This is called the “purchase price infirmity doctrine.”

In 2007 Congress passed the “Mortgage Forgiveness Debt Relief Act of 2007.” This act adds to the exceptions, up to $ 2 million, if the indebtedness is discharged due to a decline in the residence’s value or the taxpayer’s financial condition. In order for this exception to apply, the debt must be “qualified” which means only acquisition loans and not home equity loans are acceptable for the forgiveness or exception to income tax.

The tax consequences of bankruptcy, short sales and the like are something the law firm can help you with, and in certain cases we can get rid of second mortgage home loans in chapter 13 bankruptcy. I just managed to accomplish this for a chapter 13 client today, and she now has no second mortgage attached to her home.

I have also expanded into criminal law, and have an increasing number of cases in that area. Please consider me if you or a friend or family member is unlucky enough to run into a criminal law problem. (303) 501- 4028 direct, (303) 670-4242. Happy New Year everyone, may it be a happy and healthy one!

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