Mortgage Tax Debt and Bankruptcy
Many consumers in the Oak Park area who struggle with various types of consumer debt also struggle to make monthly mortgage payments. For some of those consumers, filing for personal bankruptcy can be an option for managing what feels like insurmountable debt. However, consumer bankruptcy may not be the best option for people who are dealing with non-dischargeable debt. While there are various types of non-dischargeable debt that cannot be erased through a bankruptcy filing, we want to say more about tax debt—and mortgage tax debt—specifically when it comes to filing for bankruptcy.
According to a recent article in Bloomberg, numerous consumers make the decision to file for bankruptcy as a result of an inability to pay the taxes on mortgage debt that is forgiven after a foreclosure or a short sale. As the article explains, consumers previously could exclude forgiven debt from taxable income, but that may be more complicated now.
How Forgiven Mortgage Debt can Affect Your Taxable Income
When it comes time to pay your taxes each year, you are required to pay a certain amount of tax based on your taxable income. Many consumers do not realize that a majority of debt that is forgiven counts as taxable income under U.S. law and, accordingly, consumers must pay tax on it. For example, if a consumer owes $20,000 to a creditor and makes an agreement with the creditor to repay $10,000 of that debt if the creditor forgives the other $10,000, then that $10,000 of forgiven debt becomes taxable income. When it comes to mortgage debt, forgiven amounts can be high.
For example, if a homeowner owes $250,000 on a mortgage and the house sells in a short sale for $150,000, the homeowner may still owe $100,000. The mortgage servicer may agree that, with the short sale, it will forgive the remaining $100,000. However, when it comes time to pay taxes, the former homeowner can owe a substantial amount of tax on $100,000 of forgiven debt.
As the article clarifies, before 2018, many homeowners could lawfully avoid paying taxes on forgiven mortgage debt. Indeed, “individuals who had mortgage debt forgiven or canceled because they lost their primary residence through a foreclosure or a short sale could exclude up to $2 million of that amount from their taxable income.” In other words, any forgiven mortgage debt would not count as taxable income up to $2 million, and consumers would not be responsible for paying taxes on the forgiven amount. However, that may not be the case moving forward.
Tax Breaks and Other Options for Debtors
The Bloomberg article explains that the provision allowing debtors to exclude certain forgiven mortgage debt from taxable income actually expired at the end of 2017. While some lawmakers anticipated that the tax break could be renewed, that has not yet happened. In the meantime, former homeowners with mortgage debt may have other options. For example, if you are insolvent, or if you have filed for consumer bankruptcy, you may not be required to include forgiven debt as part of your taxable income. After all, for most debtors, the amount of tax owed on forgiven mortgage debt can total more than $10,000.
At the same time, however, it is important for debtors to speak with a bankruptcy lawyer before filing for bankruptcy. Depending upon when the tax debt became due, and when a person files for bankruptcy, that tax debt may not be dischargeable under the U.S. Bankruptcy Code. A bankruptcy attorney can assess the details of your case and help you to make an informed decision about your best options.
Contact an Oak Park Bankruptcy Lawyer
If you have questions about taxes on forgiven mortgage debt and bankruptcy, a bankruptcy attorney in Oak Park can help. Contact the Emerson Law Firm today.
See Related Blog Posts:
What Are the Functions of a Bankruptcy Trustee?
What is Credit Counseling for Personal Bankruptcy?
According to a recent article in Bloomberg, numerous consumers make the decision to file for bankruptcy as a result of an inability to pay the taxes on mortgage debt that is forgiven after a foreclosure or a short sale. As the article explains, consumers previously could exclude forgiven debt from taxable income, but that may be more complicated now.
How Forgiven Mortgage Debt can Affect Your Taxable Income
When it comes time to pay your taxes each year, you are required to pay a certain amount of tax based on your taxable income. Many consumers do not realize that a majority of debt that is forgiven counts as taxable income under U.S. law and, accordingly, consumers must pay tax on it. For example, if a consumer owes $20,000 to a creditor and makes an agreement with the creditor to repay $10,000 of that debt if the creditor forgives the other $10,000, then that $10,000 of forgiven debt becomes taxable income. When it comes to mortgage debt, forgiven amounts can be high.
For example, if a homeowner owes $250,000 on a mortgage and the house sells in a short sale for $150,000, the homeowner may still owe $100,000. The mortgage servicer may agree that, with the short sale, it will forgive the remaining $100,000. However, when it comes time to pay taxes, the former homeowner can owe a substantial amount of tax on $100,000 of forgiven debt.
As the article clarifies, before 2018, many homeowners could lawfully avoid paying taxes on forgiven mortgage debt. Indeed, “individuals who had mortgage debt forgiven or canceled because they lost their primary residence through a foreclosure or a short sale could exclude up to $2 million of that amount from their taxable income.” In other words, any forgiven mortgage debt would not count as taxable income up to $2 million, and consumers would not be responsible for paying taxes on the forgiven amount. However, that may not be the case moving forward.
Tax Breaks and Other Options for Debtors
The Bloomberg article explains that the provision allowing debtors to exclude certain forgiven mortgage debt from taxable income actually expired at the end of 2017. While some lawmakers anticipated that the tax break could be renewed, that has not yet happened. In the meantime, former homeowners with mortgage debt may have other options. For example, if you are insolvent, or if you have filed for consumer bankruptcy, you may not be required to include forgiven debt as part of your taxable income. After all, for most debtors, the amount of tax owed on forgiven mortgage debt can total more than $10,000.
At the same time, however, it is important for debtors to speak with a bankruptcy lawyer before filing for bankruptcy. Depending upon when the tax debt became due, and when a person files for bankruptcy, that tax debt may not be dischargeable under the U.S. Bankruptcy Code. A bankruptcy attorney can assess the details of your case and help you to make an informed decision about your best options.
Contact an Oak Park Bankruptcy Lawyer
If you have questions about taxes on forgiven mortgage debt and bankruptcy, a bankruptcy attorney in Oak Park can help. Contact the Emerson Law Firm today.
See Related Blog Posts:
What Are the Functions of a Bankruptcy Trustee?
What is Credit Counseling for Personal Bankruptcy?
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