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Irs Disaster Alert, Tax Bill in the Mail for Charged off Debt
UNKNOWN TAX BILL
It has been one disaster after another and still is, when the Wall Street meltdown of investment banks, took down every Americans net worth in the year 2007 up to now. Home equity dropped from 30% to 80% in every county in the nation, and wiped out a large number of small businesses, including the real estate business.
The real estate sales in Aspen Colorado ski town and Telluride ski town, dropped from a high in 2006 to a 30% to 70% drop in sales, and wiped out a large amount of equity in the homes and land. This was the final curtain, The End of the boom years in each of those towns, that had ran from the late 60's to 2006. As the CEO of Intrawest proclaimed in the Wall Street Journal in 2008, "The sales of ski resort real estate has not stalled , they have vanished."
Now another silent disaster is looming for every American, including all ski towns. The banks are aggressively sending out the tax form 1099C to debtors and to the IRS, and stunning and shocking the recipients. These forms are being sent to the IRS from banks all over the land, and they are for real. The Federal law that stipulates a payment for debt that has been charged off by banks, requires that debt from credit cards, bank loans, and foreclosed investment properties of all kinds, be taxed as personal income. If you owed several banks a hundred thousand on credit cards to keep your business running after the meltdown, or a small business loan, or an equity loan on investment properties, and the loans were charged off for non payment to the banks, a tax bill will be due as part of your income.
Congress passed a law in 2007 during the beginning of the worst recession since 1929, that a personal residence was exempt from this law. This means that if you ran up a huge debt called a home equity loan, and were foreclosed upon the home, you were exempt from the tax on the cash you accumulated, up to $2 million for married couples, and $1 million for single individuals. Cash from home equity loans must be used for home improvement. Farm and business real estate loans are also exempt from charge off debt taxes.
Please check the IRS rules with your accountant and the Federal Government handbooks to make sure you are in a good position, and before you do anything. For example, what you can actually use the money for, from personal home loans must be researched.
If you are insolvent before a charge off of the debt, you do not have to pay the IRS as personal income. Insolvency means that your assets are less in value than your debt, which is very possible now since the meltdown of values. The insolvency form is number 982.
The bad news is this law expires at the end of 2012. Many people, in business in Telluride Colorado ski town, for example, who ran up huge home loans on their personal homes, to survive as a last stand in their business, will be exempt if they are foreclosed on before the end of 2012. They will have to make sure the IRS accepts how the cash was used from their personal home. If Congress does not extend this provision, you will be taxed on personal home properties that end up being lost through foreclosure. If you have a $300,000 to $2 million dollar personal home loan, and go through foreclosure, you will be taxed as personal income, after the end of 2012. This is a double blow. You lose your home due to the Category V Hurricane, that has been blowing for 4 years, and end up with a large tax bill.
What can you do about this problem. If you feel like your financial life is heading south, you can ask the bank for permission to do a short sale on your personal home, get rid of the debt before the end of the year, and go on with your life. The other choice is to take a big chance that Congress will extend the law past the end of 2012.
There is another alternative. If you made less than $40,000 per year, you can file chapter 7 bankruptcy, get a discharge on all of your debt, excluding student loans, and never be taxed on the cash you received over the years for investment property equity loans, credit cards, and personal home equity cash you received, no matter how and for what the money was used. This means test amount varies from state to state. You may even get discharge of 3 year old IRS taxes. A large number of people are afraid of chapter 7 bankruptcy. David Ramsey, the credit guru, is scaring people and advises not to file. He is dead wrong, and has many critics for his preaching about paying all debt as a moral value. All of these contracts with banks, are business contracts, not moral, philosophical issues. In two years, credit can return with zero debt, and the IRS will never send you form 1099C. If they make a mistake and send the form, you need to send them your proof of your chapter 7 discharge documents from a federal judge. If your conscience bothers you, it is legal to pay back the debt after discharge at your own interest rate, and at your own time, with no harrassing phone calls.
Many people looking at possible retirement are being advised by smart money advisors and smart attorneys to take the route of chapter 7, as part of retirement planning.
"In Heaven and Earth Horatio, there is more than is in your philosophy," William Shakespeare.