Typically when a creditor forgives debt they are owed, the forgiven debt can be considered taxable income for the forgiven debtor. However, the tax code expressly excludes forgiven debt if the discharge occurs in a bankruptcy case, or the discharge occurs when the debtor is insolvent…when the debtor’s liabilities exceed the debtor’s assets. If the debtor is insolvent at the time the debt is forgiven, the forgiven debt is excluded only to the extent of the amount the debtor is insolvent.
However, under the Mortgage Forgiveness Debt Relief Act of 2007, a debtor with forgiven debt on a primary residence does not have “forgiven debt” income as long as the amount forgiven is less than $2 million. There are some additional qualifications with respect to second or subsequent mortgages, and anyone with this situation should certainly speak with an attorney or other tax professional.
Similar Posts:
- Bankruptcy No Laughing Matter
- Anatomy of a Chapter 13: Part 1
- Video Mogul Files for Second Bankruptcy in Three Years
- A Time to Throw in the Towel When Bankrupt
- Honest Abe Takes Honest Way Out
Tags: Forgiven, Forgiven Foreclosure
Recent Comments