Nick C. Thompson Provides Advice on Foreclosure and Bankruptcy –Beware Tax changes Jan. 1, 2013

By Nick C. Thompson

I am writing this because at some time you emailed our office and I wanted to take a moment to explain a huge change in the tax law that will happen after 12-30-2012. The Mortgage Forgiveness Debt Relief and Debt Cancellation Act will expire on that date.People that have a foreclosure deficiency or mortgage modification after December 30th will be hit with a tax debt.

The IRS on its website specifically outlines how this also applies to anyone that has a credit card charged off, or car repossession. If there is any unpaid debt charged off, the lender will issue a 1099-C for the individual just as if you worked for the bank and had the unpaid debt as income. As an example if you owed 300,000 for your home and the home sold for 100,000 and the unpaid deficiency is 200,000 there would be about a 40% tax or $80,000 plus any interest and penalties. After 2012 any foreclosure deficiency or mortgage modification will generate this income tax assessment.

If a person can’t pay a mortgage there is probably no way to repay such a debt, However the IRS can seize bank accounts and garnish wages without going to court first and with very little warning. About the only practical way to guarantee avoiding this tax is to file bankruptcy before the home sells. Filing bankruptcy first insures there is no legal responsibility when the debt is charged off. There are three other methods to avoid liability including proof of insolvency, a non-recourse loan or certain farm debts. But qualifying for any of those exclusions is difficult or impossible.

We have been advised that the IRS has dramatically increased its enforcement and audit division to handle the increase in taxes from this change. If you want more information on this you can visit the IRS webpage on Mortgage Forgiveness Debt Relief Act and Debt Cancellation or visit our website or our webpage on how to bankrupt income taxes. We want to make sure our clients don’t get caught with this tax debt.

Nick C Thompson

800 Stone Creek Parkway Suite 6

Louisville KY 40223

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