Short Sale or Bankruptcy in Oklahoma is a dilemma people have when they’re are facing foreclosure and other overwhelming debts. A short sale gives struggling homeowners a chance to avoid foreclosure by surrendering their homes for less than they owe on the mortgage. Sometimes Lenders approve short sales and agree to forgive the mortgage balance remaining after the short sale which effectively cancels the debt. Another course of action is struggling homeowners could file bankruptcy, surrender their home, and cancel the debt with the bankruptcy discharge. To determine which method is most beneficial to the homeowner we consider some of the tax consequences.
Cancellation of Debt Income (CODI).
What is Cancellation of Debt Income (CODI)? Your creditors are required to file a report (10-99-C) with the IRS when any of your debts are canceled, forgiven or discharged. Then you must include the canceled amount in your gross income as Cancellation of Debt Income (CODI) and pay taxes on that income. So in our short example above, if the struggling homeowner carries forward with a short sale the amount of the debt cancelled must be included as part of the homeowner’s income and he would have to pay taxes on the full amount. However if the struggling homeowner filed bankruptcy, surrendered his home and cancelled the debt in bankruptcy the result would be different.
Exceptions to Cancellation of Debt Income.
Not all Cancellation of Debt Income must be included in gross income. There are several exceptions, For example, if the discharge of indebtedness occurs in a bankruptcy or occurs when the taxpayer is insolvent the amount of the cancelled debt does not need to be included. The income does not need to be included if the indebtedness discharged is qualified farm indebtedness, is qualified real property business indebtedness or is a student loan that has been discharged due to the death or total permanent disability of the borrower.
Therefore in our example if the struggling homeowner chose to file bankruptcy he would save on taxes because the amount of debt would have been cancelled in a Title 11 bankruptcy. Now, if you first cancel the debt and later file bankruptcy on other debt you may not be able to discharge the tax debt owed as the result of the cancelled debt. This is because most tax debt is not debt forgiven in bankruptcy.
Our Tulsa Bankruptcy Lawyers Can Help.
Short Sale or Bankruptcy in Oklahoma is a dilemma people have when facing foreclosure. The answer and consequences sometimes surprises people. Bankruptcy is an option and its offered to you by the Federal government but you must qualify. You don’t have to live with the fear and anxiety of bad debt. Bankruptcy is an option that’s been around for many years. Too often people fight a battle with debt that they cant win. If your debt in relation to your income is overwhelming a chapter 7 or a chapter 13 bankruptcy might be for you. The Tulsa Oklahoma bankruptcy lawyers at Kania Law Office will answer any questions you have. Get a free and confidential consultation with a bankruptcy attorney near you. 918.743.2233