Dec 14 2008
Bankruptcy and the IRS: Do you know why they’re related?
Bankruptcy seems to be everyones fall back plan these days, if it doesn’t work out I can always file bankruptcy and start over. It is true that bankruptcy can be the difference between losing everything you have and giving yourself a fresh start to build upon, what they don’t tell you however is that it will cost you more than the legal and court fees.
I looked into filing bankruptcy, I even hired a bankruptcy lawyer; gave him a percentage of the final cost and paid for the required Debt Counseling. I went over my debts, assets and my possible tax filing situation and realized that bankruptcy was going to cost me more than I make in four months from my employment.
See with cancellation of unsecured debt you have the responsibily of reporting that forgiveness as income on your taxes. Not all debt cancellation falls into the reportable income, you could be in insolvent when you file (means that your total debts are more than half of the fair market value of your total assets, if you believe you may be eligible for this please seek the advice of a tax professional).
Now if you owned a home you could file using the Mortgage Forgiveness Debt Relief Act of 2007 to help offset the amount you will be taxed on. You can also itemize your deductions and include any medical bills that were payed off to bring your taxable income down further.
With all that being said, bankruptcy can be beneficial to some people you really need to scrutinize each possible alternative before you make a finite decision, this is your financial future we are taking about here.
