Part of our job as Riverside personal bankruptcy attorneys is to explain the ripple effects that our services can provide. At this time of year in particular, that means explaining the tax implications of a bankruptcy, loan modification or other major financial move. As a New York Times blog post set forth Jan. 29, taxes may look substantially different this year for people who underwent major financial changes in 2009. For many of our clients, this includes cashing out investments, having debt forgiven or losing a job.
People who settled debt without bankruptcy, were foreclosed on or had principal forgiven on a loan may be surprised to learn that the forgiven debt is taxable. That's because the IRS counts it as "income," even though a lack of income is likely what led to the debt forgiveness in the first place. There are several exceptions to this rule. Debts discharged in bankruptcy don't count as income. Thanks to a 2007 law, the federal government will also ignore forgiven debt that comes from a foreclosure or forgiven mortgage on your primary home, as long as it doesn't exceed $1 million for individuals and $2 million for married couples. However, this only applies in specific circumstances, so you should talk to a tax professional before making decisions. Finally, you can avoid paying taxes on forgiven debt if you can convince the IRS that you're insolvent, which means your debts exceed your assets.
Unfortunately, many of our clients who get into financial trouble make financial moves that will also complicate their taxes. Cashing out retirement savings, for example, will mean paying income tax on what you took out as well as a 10% penalty. Selling investments can qualify you for a capital gains tax. And unemployment insurance payments are taxable after the first $2,400. The plus side is that if you lost income in 2009, you will drop into a lower tax bracket. And very high medical expenses, which bring too many of our clients into our office, are tax-deductible under certain circumstances.
Our Lakewood consumer bankruptcy attorneys can't overemphasize the importance of understanding these rules before you file your taxes. Innocent mistakes may not be harshly punished, but by failing to take the steps needed to show you're insolvent, for example, you could be locked into higher taxes than you need to pay. Worse, you could end up in a tax debt situation that you'll need professional help to change. To make matters worse, recent debt to the IRS cannot be discharged in bankruptcy. When working with clients, we provide individual counseling about tax implications of bankruptcy and other financial moves. We also counsel clients on related matters, like discharging difficult debts like student loans or unpaid child support.
At Howard Law PC, we stand by our clients' sides throughout the complex and difficult process of a bankruptcy. Bankruptcy is a major decision with long-term financial implications, which is why our Mission Viejo individual bankruptcy lawyers start each case by making sure bankruptcy is truly the best option for this client. If it's not, we can offer alternatives like out-of-court debt settlement, mortgage loan modifications or even a predatory lending lawsuit. If we go forward with a bankruptcy, we can explain the differences between Chapter 7 and Chapter 13 and how each one will affect the client's assets. We want to leave our clients in the best possible situation to rebuild their financial and personal lives.
If you feel like you're drowning in debt and can't see a realistic way out, call Howard Law as soon as possible. We offer confidential, free consultations and can stop creditors from calling immediately after clients file. To learn more, you can reach us toll-free at 1-800-872-5925 or contact us through the Internet.