Some homeowners are unfortunate enough to go through the whole ordeal of foreclosure. But what make it truly terrifying is a year’s worth financial demise that goes right after that. This year long period is mandatory when trying to jump back to your financial feet. Relocation due to home loss is the first thing they need to go through. Then it’s a matter in trying to re-establish their credit that’s been so heavily diminished by the foreclosure. And after struggling with the former for a while, they’ll be greeted by a 1099A/C letter. This letter comes with an offer of debt cancellation given by the creditor. Sounds good deal, doesn’t it? Well it is a good deal for the most part, if you exclude the outrageous taxation that comes with it. Yeah that’s right. They actually need to pay a tax for the debt they are forgiven.
The double edged blade
This raises some questions and we need to stop and take a moment to realize what debt forgiveness means for the forgiven. It can all be traced back to the, oh so famous, 1099 letter. Upon the ending of a foreclosure or short sale, some lenders are obligated to give out a 1099 letter to the homeowner. If a 1099 letter is sent, it means that the debt wasn’t paid off entirely, and it’s their responsibility to pay the difference. Upon receiving a 1099A or 1099C letter, the homeowner is needs to report it to the IRS. In it lies the statement that your debt is forgiven, but that you need to pay the estimated tax for it.
Bankruptcy as the way out
While bankruptcy sounds pretty harsh on its own, it can still prove to be a light on the end of the tunnel. Even though some might find it financially crippling, for others it means financial freedom. Bankruptcy is a tool made especially for those who are struggling with financial failure. But still, even though it seems like the perfect solution, filing for bankruptcy can rid you of your well deserved 1099 letter. To get the best of both worlds a number of factor surrounding bankruptcy needs to be taken into consideration. Most of all timing plays the biggest role because it’s of upmost importance that you wait the right amount of time before being declared bankrupt.
When you look at it from a distance, bankruptcy is actually a double-edged blade. Don’t be hasty because it might not be the best problem-solving solution you have at your disposal. Your loan giver might not be reporting the amount of money precisely. This can get you in trouble with the IRS. Look at all the options you have at your disposal before you jump the gun. It all work in a way where you are not supposed to receive the 1099 letter if your debt is discharged. Ignoring that might cause trouble along the road of financial stability. Be wary of dodgy lenders. If you’re struggling with foreclosure, the best option by far is to lawyer up or get some sort of financial advice from other professional sources.