If you cannot repay money owed , then creditors have the ability to issue a 1099, if $ 600 or more are forgiven from the debt by the creditor. Under the Mortgage Debt Relief Act of 2007 , you can exclude from your income a 1099 issued on your principal residence, if the loan secured was less than $ 2 million as a couple or $1 million separately. If you have defaulted under credit cards or have the case of repossession of personal property or vehicles, then the creditor is obligated to issue a 1099-c for Cancellation of Debt if the forgiven amount is more than six hundred dollars. Most creditors in Texas will not issue the 1099 until they have reached the 4 year mark for the Texas breach of contract provisions to bring the suit. In Texas, if you default under a contract, the window to bring a suit to seek judicial relief is four years. During this 4 years, if the creditor is attempting collection, then they have not forgiven the debt, after the 4 years, you have an affirmative defence to the collection of the debt and Texas courts could not give relief. For national credit reporting purposes, the debt can be reported for up to 7 years. But if the creditor issues the 1099, then it should not longer be reported on your credit report. The effect of receiving the 1099-C is that the amount forgiven is treated as income and you have to pay taxes on this forgiven amount.
Exclusions exist to the 1099-c income tax which are:
At our firm, I file bankruptcy to avoid the tax liability. However, you may be able to avoid the bankruptcy under Exclusion 2, if your debts were cancelled during insolvency. This would require form 982 . As someone who discharges the debt, and rarely works with tax forms other then read them, I would make sure if you use this provision then that your tax preparer is familiar with the form.
If you have received the 1099-c, I would suggest not delay in hiring a bankruptcy attorney. If you rely on your tax refund for property taxes, or as a stimulus to pay for necessities, then by filing bankruptcy and serving a notice to the IRS, you may be able to avoid the tax provided you timely file and receive the full amount of the refund.
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