With the recession in full swing, there have been a number of stories about over encumbered individuals by credit cards and what happens to them. When many people get burdened with debt, most individuals will try debt reduction by negotiating down the balance of their credit card. Another form of debt reduction is hiring a debt consolidation company to negotiate the unsecured debts down with one easy payment. While all these forms of debt elimination almost seem too good to be true, in many cases they are. Another problem Americans are facing since the real estate meltdown is foreclosure. Real estate prices are continuing to decline and most people owe more than what the home is worth. Short selling is an option, but in today's market it doesn't always work out. Many people just walk from their homes when faced with foreclosure. The problem that arises is when the bank liquidates the home, there is a deficiency on what is owed. Who is responsible for this? If the individual would file for bankruptcy this would wipe out the deficiency in the bankruptcy filing. If they don't, creditors have been sending out an IRS 1099C to the debtors and they will have to file this as income.
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Filing bankruptcy is the easiest way to remove this phantom income from your taxes. If you file for bankruptcy and receive a 1099C, you need to file IRS form 982 to show that the income is no longer taxable. It's relatively simple when it comes to debt that is discharged in bankruptcy. If you don't file for bankruptcy you will be responsible to pay taxes on the full amount. If you're losing your house to foreclosure and can't pay your credit cards, it would be common sense to think that there is no way you will be able to afford the taxes on a deficiency from your house or a debt reduction from your credit cards.
When it comes to this situation, Chapter 7 bankruptcy is king. Many people feel that they are doing the right thing by paying back some of the debt. Seems like a great idea, but when the credit card company turns around and nails you with a 1099C for the amount written off, you'll start singing a new tune. Speaking with a bankruptcy attorney before you get caught up in negotiations with your creditors can be enlightening. If you're a person that has a large amount of unsecured debt and qualifies for Chapter 7 bankruptcy you can wipe out the entire amount along with the liability that goes with it. When creditors are negotiating with you they try to act like they're your friends, but the veil comes off as soon as you send them your hard-earned money.
If you're in the position of losing your home to foreclosure, another option is to file Chapter 13. If you make enough money and want to pay your debts back Chapter 13 bankruptcy allows you to negotiate a payment plan with your creditors that will last 3 to 5 years. This will allow you to catch up on back house payments and keep your home. Both types of bankruptcy include the automatic stay, which will stop all collection activity, including foreclosure, against the debtor. Always consult a bankruptcy attorney to help make your decision regarding filing bankruptcy.
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