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Bankruptcy helps avoid tax due on forgiven debt

When could you have to pay taxes on money that you owe? When someone, like a credit card company, forgives the amount that you owe. The IRS calls this “canceled debt” or “forgiveness of debt income” and it’s something that you need to watch out for if you owe money that you aren’t paying back.

According to the IRS, you’ll know if one of your debts has been canceled if you receive a form called a 1099-C, entitled “Cancellation of Debt”. You’re supposed to report the amount of the cancelled debt on your annual tax return.

So if you get a 1099-C in the mail, does that mean you automatically have extra income that might cause you to owe more taxes? Not so fast.

You might qualify for an exception to (or even an exclusion from) the rule that cancelled debt counts as income. One of the best-known ways to get this “extra income” excluded from the rest of your income is through bankruptcy. The kicker is that you need to have filed the bankruptcy before the debt was canceled!

Want to know what puts you at high risk of having canceled debt? Debt settlement or debt negotiation. If you hire one of those “debt settlement” companies that says they can knock out your debt for pennies on the dollar, or even if you negotiate down the debt yourself, the leftover amount that you owe but don’t pay is likely to get canceled – and to earn you a big 1099-C form.

This is just one more reason to consider bankruptcy instead of debt settlement. Check it out – a bankruptcy consultation cannot hurt and it’s a good way to explore all of your options, including both bankruptcy and non-bankruptcy options. When was the last time a debt settlement company was able to do that for you? [Answer: Never]

Call me at (201) 676-0722 to schedule a telephone consultation.

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