Indiana Bankruptcy Attorney Warns About Tax Surprise

March 19, 2013 11:41 pm Published by

April Fool’s Day is a couple of days away, but, as a debt consolidation lawyer, I know there’s one nasty surprise many debtors never seem to expect. If, during 2012, one of your creditors settled with you for a discounted payment, now it’s going to be your turn to pay the price. As one of my Columbus bankruptcy lawyer colleagues likes to put it – “You were forgiven last year. You’re bearing the blame this year.”

What is it all about, this tax surprise? Suppose you owed $4500 to Discover® card or MasterCard®. Either on your own or through some sort of debt settlement plan, you negotiated with the creditor to take $2000 and “call it a day”, meaning forgive the $2500 (knowing you’d probably never be able to pay off the full $4500).

Well, as every bankruptcy lawyer in Indiana well knows (but which usually debtors forget), the IRS notices. In fact, the credit card company, by law, had to report any forgiven debt that is more than $600. So now the IRS is “in” on the $2,500 “benefit” you’ve received in 2012. And what that means is that you have “income” of $2500 to pay tax on.

Every day of every spring, in every one of the five Zuckerberg bankruptcy law offices, we get the tissue boxes out, because this is one surprise that doesn’t bring smiles, but tears.  Sure, people who visit a bankruptcy law office may not all be in the highest tax bracket (although, you’d be surprised how many are!), 15% of $2500 is $375, and that has a way of taking an unpleasant bit out of a tax refund.

There are several ways in which this “surprise forgiveness tax” can impact the way in which I can offer Indiana bankruptcy help:

  • Many clients had planned to use their tax refund to help pay for the costs of filing personal bankruptcy in Indiana
  • Since the tax generated by this forgiveness is “new” (meaning generated in 2012), it cannot be gotten rid of through bankruptcy itself. (Back income taxes that are more than three years old, given certain qualifications have been met, can be discharged through bankruptcy.)
  • My Bankruptcy in Indiana readers are used to me railing against most debt settlement companies.  One of the reasons for that is that those companies often don’t disclose when the settlement is negotiated that there will be a tax liability.

Now that you’re in on the surprise, consider yourself forearmed.  Time for that no-obligation meeting with one of our good bankruptcy attorneys in Indiana to plan your come-back strategy!


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This post was written by Mark Zuckerberg

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