Thomas B. Hjerpe, Esq.
Kenneth J. Collins, Esq.
Jocelyn M. Godniho, Esq.
Catherine M. Koshkin, Esq.
350 E Street, First Floor
Eureka, CA 95501
Telephone: 707 442-7262
We are a debt relief agency. We help people to file for bankruptcy relief under the Bankruptcy Code
The “Debt Relief Tax” is a tax based on income you did not receive - it is a tax based on the amount of debt that you were not able to pay.
If you do not pay a debt the lender will “charge-off” the debt. A charged-off debt in this context will appear on your credit report with a “zero” balance. There are two dangers. The first is that the balance can still be collected – the lender can still sue you for the balance of the debt. The second is that the Internal Revenue Service and the California State Franchise Tax Board will treat the written-off portion of the debt as "income" for tax purposes and they will tax you as if you had received this amount as income during the year that the debts are charged-off.
In the case of settlements, the amount of the debt that goes unpaid is “charged-off” and treated as income for tax purposes. If you negotiate 45% settlements with your credit cards, the 55% that was forgiven will be considered as "income" by the IRS and the SFTB and they will tax you as if you had received this amount as income during the year that the debts are settled.
The same issue comes up after a foreclosure or a short-sale. The danger with home loans is that the balances are so large that the resulting debt relief tax can be overwhelming.
There is an exception to the "debt relief tax," for situations where you are "insolvent" at the time that the debt is forgiven. There may also be exceptions for a mortgage loan on your residence. You will have to talk with your accountant to determine whether you are "insolvent" under the tax code for purposes of the debt relief tax or if you qualify for other exceptions.
For debts that are eliminated [“discharged”] in bankruptcy, the Bankruptcy Code provides that the "debt relief tax" is inapplicable. There is no debt relief tax after a bankruptcy.
A short-sale can be an excellent tool with mortgage loans - unless it results in overwhelming tax debt
Remember to consider the debt relief tax when budgeting for settlements.
There is no debt relief tax for debts eliminated in bankruptcy