For Memphis residents who have been through the bankruptcy process this year, the process of restructuring debt offers much needed relief from the stress of being unable to make regular payments. The bankruptcy process does offer finality and a clear resolution to debt problems, but the hard work continues after the filing is complete and payments are due on the restructured debt. In addition, borrowers should be aware of the other peripheral implications of a bankruptcy filing, such as unexpected tax liability.
An extension of an important tax relief program means that forgiven debt from a short sale or a home foreclosure will not be treated as income for tax purposes. For many Memphis borrowers this is crucial, since the forgiven debt on a home may be substantial and could lead to significant tax liability.
However, it is important to remember that this law applies only to forgiven mortgage debt and does not offer relief for other types of debt forgiven during the bankruptcy process. In particular, many Memphis borrowers are surprised to find out about tax liability for forgiven credit card debt. Borrowers are responsible for income taxes on any forgiven credit card debt worth $600 or more in a single year.
Planning for this part of the tax process is very important, since an unexpectedly high tax bill could renew financial struggles just as borrowers are getting back on their feet. Luckily, the IRS does offer payment plans to settle tax bills over time rather than all at once.
Source: Orlando Sentinel, “Forgiven credit card debt can be taxable,” Donna Gehrke-White, March 4, 2013.
More information about debt management is available on our Memphis bankruptcy page.