Declaring Insolvency to IRS

If someone is insolvent at the time of a shortsale and is issued a 1099 for forgiven debt, does filing insolvency with the IRS affect a person's credit? Does the IRS report to the credit bureaus? It would seem that if one files by the deadline and is technically insolvent, then there is no default of debt because none is technically due. Anyone know about this?

Edited: 06/26/2010 at 11:37AM

Jim Wineinger

Real Estate Investor · ten mile, Tennessee

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Feb 11 '10, 12:58 PM

Being insolvent only means the inability of someone to pay the debt as it comes due.

It does not mean that a debt is not owed. Nor does it mean that a debt can not be collected at a future date. Nor does it affect the date on which a debt becomes due.

Since there is still a debt that debt can be reported to any credit agency!!!!!

If a creditor decides to forgive a debt then it is the same as giving the debtor the money back and the IRS considers that as income to the payor which then becomes a debt according to the income tax rules as to when it should be paid.

Declaring insolvency to the IRS only tells them that they will have a future problem in collecting the taxes that will be due at a future date.

Remember that declaring insolvency really means that at this point in time you can not pay, it does not mean that you wont be required to pay the debt at a future point in time when your current insolvency changes.

This is where a judge can step in (in banduptcy proceedings). The judge will mediate for the consumer an agreement where one creditor waits and it allows all the rest to be paid on time then the other creditor gets paid thus solving the insolvency problem without the need for any debt to be forgiven (bankruptcy).

Insolvency becomes bankruptcy when the creditors will not or can not work out anything with a judge or consumer.

Sorry about being longwinded about this, but it seemed needed to help you understand that your last question is in error.

It would seem that if one files by the deadline and is technically insolvent, then there is no default of debt because none is technically due. Anyone know about this?

You are in default of debt at anytime when you do not pay that debt at the due date.

Edited: 06/26/2010 at 11:37AM

Jim Gordon

Residential Real Estate Agent · Ohio

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Feb 11 '10, 06:27 PM

You can not have your Fedederal taxes wiped out by bankruptcy.

Edited: 06/26/2010 at 11:37AM

Kathryn K.

Real Estate Investor · San Pablo, California

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Feb 12 '10, 07:16 AM

Thanks for the info. It sounds like the IRS can continue to pursue the debt, potentially tacking on late charges, etc.

Edited: 06/26/2010 at 11:38AM

Steve Babiak

Real Estate Investor · Audubon, Pennsylvania

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Feb 12 '10, 07:26 AM

Go to the IRS website and look up form 982. See links provided below.

http://www.irs.gov/pub/irs-pdf/f982.pdf

http://www.irs.gov/individuals/article/0,,id=179414,00.html

http://www.irs.gov/pub/irs-pdf/p4705.pdf

http://www.irs.gov/pub/irs-pdf/p4681.pdf

http://www.irs.gov/irs/article/0,,id=179073,00.html

Edited: 06/26/2010 at 11:38AM by Steve Babiak

Kathryn K.

Real Estate Investor · San Pablo, California

51 posts
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Feb 12 '10, 09:00 AM

Thanks for the links, Steve! According to my interpretation of the info in the second link, cancelled debt that is incurred while insolvent may in fact not be taxable. All or a portion of it anyway.

Edited: 06/26/2010 at 11:38AM

Jim Wineinger

Real Estate Investor · ten mile, Tennessee

1,501 posts
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Feb 13 '10, 06:01 AM

Some yes, and some no. As with any creditor, the IRS has the right to cancell your debt themselves due to your insolvency, and often has, but that does not mean they have to unless ordered to do so by a court, just like any other creditor. But then we all know how often we are able to get our case into a court that has jurisdiction over the IRS.

Edited: 06/26/2010 at 11:38AM