Filing Taxes and other things

[cspa522]

1. We used to work with a debt settlement company, and through them we settled three of our credit cards, two in 2010. We knew that we were going to have to claim (on our taxes) the difference in what we actually owed vs. what we settled for, and were determined to file BK before the end of the year to avoid this. (among the other many reasons we needed to file, this was simply a perk!)

I brought this up to my attorney several times before we filed.

We filed last week, and I emailed my attorney later on with a few questions that came to mind after it was all signed and done. One of which was "When we go to file our taxes, what do we do about the money we are going to be required to claim as income from settling with two of our credit cards?"

She came back and told me "You should have included them on your petition. Did you?"

I have brought this up to her several times, and this is the first time she has said anything to me about including them on our petition.

I'm guessing/hoping that we will need to rewrite our paperwork to include them, but I don't know. Any ideas? I'm really, really irritated right now that she made it sound as if it's my fault for not knowing to include them, when she never once told me to.

At worst, it makes our payment go up, which is okay. We can afford for it to go up a bit. Lots of wiggle room in our current (and not yet confirmed) plan. But the hassle of it, and the idea that it's my fault, is just incredibly irritating.

Advice?

2. HOW is filing your taxes different after you've filed a BK? Everything I've read says it shouldn't be any different, but I tend to not believe it's that easy.

[LadyInTheRed]

You already settled the debts and paid them. You now owe those creditors nothing, right? (ETA: I mean, at the time of filing you owed the creditors nothing). If you don't owe them anything, they do not need to be listed as creditors. Is it possible your attorney misunderstood the question and thinks you still owe these creditors? Or, maybe she just wants to add them to be safe? Depending on how long you settled before filing BK, the settlements may also need to be reported on your statement of financial affairs.

Your CPA is a better person to ask about filing your taxes than your attorney.

But, if you file your own taxes:

If you no longer owe the creditors, the bankruptcy itself does not exclude the forgiven amount from taxes. Bankruptcy only excludes debts that were actually discharged in the bankruptcy. If you were insolvent immediately prior to the settlement, then you don't have to pay tax on the amount foregiven as long as that amount doesn't exceed your insolvencey. This would be true even if you didn't file bankruptcy. The insovlency exclusion is explained with examples on page 4 of IRS Publication 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf.
To claim the exclusion, you will need to file form 982 with your income tax return: http://www.irs.gov/pub/irs-pdf/f982.pdf.

Filing bankruptcy does not change how you file your taxes, unless you get a 1099c for debt discharged in bankruptcy in which case you have to file form 982.

ETA: I have no experience with the taxation of foregiven debt. Everything above is based on a few minutes of reasearch on the IRS website. So, please confirm all of this with a CPA or with your own research.

[cspa522]

You already settled the debts and paid them. You now owe those creditors nothing, right? (ETA: I mean, at the time of filing you owed the creditors nothing). If you don't owe them anything, they do not need to be listed as creditors. Is it possible your attorney misunderstood the question and thinks you still owe these creditors? Or, maybe she just wants to add them to be safe? Depending on how long you settled before filing BK, the settlements may also need to be reported on your statement of financial affairs.

Your CPA is a better person to ask about filing your taxes than your attorney.

But, if you file your own taxes:

If you no longer owe the creditors, the bankruptcy itself does not exclude the forgiven amount from taxes. Bankruptcy only excludes debts that were actually discharged in the bankruptcy. If you were insolvent immediately prior to the settlement, then you don't have to pay tax on the amount foregiven as long as that amount doesn't exceed your insolvencey. This would be true even if you didn't file bankruptcy. The insovlency exclusion is explained with examples on page 4 of IRS Publication 4681: http://www.irs.gov/pub/irs-pdf/p4681.pdf.
To claim the exclusion, you will need to file form 982 with your income tax return: http://www.irs.gov/pub/irs-pdf/f982.pdf.

Filing bankruptcy does not change how you file your taxes, unless you get a 1099c for debt discharged in bankruptcy in which case you have to file form 982.

Okay. We signed up with a debt settlement company 18 months plus before we decided to finally file for bankruptcy. We were unable to pay our creditors, and settled with American Express in 2009, and Citibank and Bank of America on 2 cards in 2010. The last one was settled in July, 2010. After that was finished we stopped our contract with the debt company to save that monthly payment in order to afford to file bankruptcy. We do not owe the creditors anything, however, we know from settling with AE in 2009 that we will have to include, as income, the difference between the amount owed and the amount settled for.

Reading over the extremely helpful links you sent me, I think we can easily claim insolvency. I tend to run here to ask questions because my attorney can take forever to get back to me (and in my mind, hours is forever ) and you guys are usually pretty darn helpful in answering my questions.

Anyway, I have to look at the numbers again, but yes, I think insolvency can be proved. We owed over $15,000 on each card and settled for under $5000 on each. We are well over that in debt, upside down on 2 mortgages, etc. I don't yet have a copy of my BK filing so I can't look at the numbers right now. I'll send a clearer email to my attorney (again) asking her about this. Thank you!!

[cspa522]

Update: Heard back from our attorney. She wants us to add the creditors, even though we have settled with them, to cover our behinds in case they sold portions of our debt and this way, they can't come back again later on and try to get money from us. I understand this, so we're having her add them in. It's a whopping $26 to do this, so it seems silly not to, to be safe. It will not change our plan. So, yay on that front!