Question about settling...

I can't tell you the tax rate and I don't believe it is that high so verify what it would be. But, the way I avoided taxes on $250k in settlements is that the IRS has a very simple form you attach to your tax return if you are insolvent on the date of the settlement and then there are no taxes. In my case, my home is underwater so my assets vs liabilities showed me to be insolvent (at least technically speaking because I don't feel like I am).

Yeah very few people actually pay taxes on the forgiven debt since most people have more debts than assets which is why they are settling to begin with. The law was actually started because a lot of corporate big wigs were getting loans from their companies to buy their million dollar mcmansions and then as a bonus the company would forgive the loan. So the IRS said that was actually income so they started taxing it, but gave an exemption to those that are financially stressed.

So I wouldn't worry so much about the IRS tax obligation unless you have tons of assets.

so if you owe more than your house is worth at the time that you settle, that qualifies for being insolvent? how do you prove that the house is underwater? we owe 395,000 plus another 38,000 home equity and the house is worth like 310,000.

you will have to ask your tax preparer what documentation they want. I did a Comparative Market Analysis to go in with my tax return, but some CPA s recommend an appraisal.

Now it's not just your house being upside down. You could be upside down in your house and not be insolvent. It's a total of your assets (cars, investment accounts, 401Ks, checking savings, personal art, guns etc) minus your total debts (mortgages, credit cards, lines of credit, car loans etc). If that number is in the negative then you are insolvent and don't have to pay the taxes on the forgiven debt.

I imagine they would go by your last appraisal value vs. your debt.

Quote:

Greetings,

Believe me,

There will be a bunch of us figuring out the tax bill for next year.:rolleyes::rolleyes::rolleyes:

Regards,
King "Kash" Jabba Labba

Thanks.

Guess I am still a bit confused - trying to figure out for my own situation whether I should declare bankruptcy chpt 7 & let them take the house to settle debts (& leave me some $$ due to homestead exemption), or if I should try to sell house quick/cheap b4 I lose it to foreclosure or lawsuits by the CCs put liens on it. I won't be keeping my house either way, and will have practically no assets for the rest of the year, except perhaps some crap wages I can make at McDonalds for 4 months or something.

If I were to sell the house (assuming a lot of things work out) I *could* get about $70,000 left over after that for me/my creditors.

I owe like $110k in unsecured debt & *assuming* I settled all of those for 40% (another big assumption), that would leave me with $26,000 after the settlements.

But then, if I understand this right, then I will be hit with an "income" of about $66,000 for the 60% of the 110k that was "forgiven" which has to have taxes paid on it.

And those taxes, assuming only federal taxes at about 30% (is that right?), and assuming no local or state taxes (probably a bad assumption and I bet all of them want some kind of chunk of that "income"), the fed tax I will owe will be about $20,000.

And assuming I still have the $26,000 left....plus any other minor assets like my car, clothes, whatever - that is MORE than $20,000, thus I would have to PAY the tax bill next year leaving me basically with - nothing left - or in this case $6000??

Is this right??

In this situation one needs to be creative. You are trying to paint a great case for the irs. Instead of doing that, take the value that trulia or zillow shows for your house...then subtract the retail cost of preparing if for sale...then subtract other selling expenses and you may not look so good. The way the irs insolvency form works is that on the date of each settlement the form is computed for the test...not the end of the year. So, Today I settled BOA and they forgave $10k. However, I still owe $40k and only have $30k in home value and $5k in other assets. I am today "insolvent" so no tax is due. Now on to the next one. You need a good tax advisor if you are not well-versed in the insolvency exclusion.

Luigi

If you file Chapter 7 you will keep home and credit cards will get nothing. That is if you can keep up payments on home. You said "If I sold home I would have $70,000 left over. So, you are saying you have that much equity in your home?? Do not foreclose, sell first.

From what you said, you are insolvent today and taxes will not be as large as you stated.

I agree with Ozzie. And the IRS is well-aware that home prices continue to decline in most of the country. Just try selling one. I had mine under contract for $600k and now cannot get $250k. It just keeps going down in value. Homeownership dream is flat out dead.

Ozzie wrote:

>>>>>>>>>>>>>>
If you file Chapter 7 you will keep home and credit cards will get nothing. That is if you can keep up payments on home. You said "If I sold home I would have $70,000 left over. So, you are saying you have that much equity in your home?? Do not foreclose, sell first.
<<<<<<<<<<<<<<

Yes, I have about that much equity in the house, assuming it sells for the price the real estate told me I could *probably* get. But the market here (everywhere?) sucks and most houses have just been sitting for sale for months.

I was told that if I file Chpt7 the trustee WILL take the house (because of the equity in it) and use that to settle with all the creditors.

Also, I'm up against it both ways though (not just CC debt) in that I can't pay my mortgage and house will be going into foreclosure soon anyways.

I was in a very similar situation with $150k cc's and an underwater home/heloc. I chose settlement over bk to keep the public record quiet (as I have a higher profile job) and because all references to settlement are over in 7 or fewer years. If I had more equity, I would have sold my house and not bk or foreclosure.

http://www.debtconsolidationcare.com/settlement/about64336-1.html