- First and foremost, bring it to the attention of a tax professional – either an accountant, tax attorney, or other professional tax preparer.
- The federal government considers canceled debt to be income for tax purposes. However, this is not always the case – there are exceptions – and sometimes canceled debt is not income that you have to pay taxes on.
- 26 U.S.C. § 108 controls when a canceled debt is or isn’t income.
- The good news is that if the debt was discharged in bankruptcy, it is not taxable income.
- If the debt was not discharged in bankruptcy (but canceled before you filed for bankruptcy), then it may or may not be taxable income, depending on whether a different exception applies. You should consult with a tax professional to determine if you qualify for an exception.
- Even if your debt was discharged in bankruptcy, don’t just ignore the 1099-C. A tax professional can help you determine which forms you need to file – but start with IRS Form 982. The IRS will also receive a copy of the 1099-C, and if the canceled debt isn’t mentioned on either your 1040 or on Form 982, you are going to trigger an investigation from the IRS.
(6) [I]n a case under chapter 7 of this title in which the debtor is an individual, not retain possession of personal property as to which a creditor has an allowed claim for the purchase price secured in whole or in part by an interest in such personal property unless the debtor, not later than 45 days after the first meeting of creditors under section 341(a), either –
(A) enters into an agreement with the creditor pursuant to section 524(c) with respect to the claim secured by such property; or
(B) redeems such property from the security interest pursuant to section 722.
Wisconsin’s default provisions are outlined at Wis. Stat. § 425.103. I’ll include them here for reference, but I’m not going into an analysis of the code. The point is that since the right of recovery is an issue of state law, the bankruptcy court has no authority to compel surrender of collateral, which means you – as a bankruptcy debtor – can force this issue before a state court judge. An informal survey suggests that most judges are not inclined to permit repossession based solely on the lack of a reaffirmation agreement.
(2) ”Default”, with respect to a consumer credit transaction, means without justification under any law:(a) With respect to a transaction other than one pursuant to an open-end plan and except as provided in par. (am); if the interval between scheduled payments is 2 months or less, to have outstanding an amount exceeding one full payment which has remained unpaid for more than 10 days after the scheduled or deferred due dates, or the failure to pay the first payment or the last payment, within 40 days of its scheduled or deferred due date; if the interval between scheduled payments is more than 2 months, to have all or any part of one scheduled payment unpaid for more than 60 days after its scheduled or deferred due date; or, if the transaction is scheduled to be repaid in a single payment, to have all or any part of the payment unpaid for more than 40 days after its scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(am) With respect to an installment loan not secured by a motor vehicle made by a licensee under s. 138.09 or with respect to a payday loan not secured by a motor vehicle made by a licensee under s. 138.14; to have outstanding an amount of one full payment or more which has remained unpaid for more than 10 days after the scheduled or deferred due date. For purposes of this paragraph the amount outstanding shall not include any delinquency or deferral charges and shall be computed by applying each payment first to the installment most delinquent and then to subsequent installments in the order they come due;(b) With respect to an open-end plan, failure to pay when due on 2 occasions within any 12-month period;(bm) With respect to a motor vehicle consumer lease or a consumer credit sale of a motor vehicle, making a material false statement in the customer’s credit application that precedes the consumer credit transaction; or(c) To observe any other covenant of the transaction, breach of which materially impairs the condition, value or protection of or the merchant’s right in any collateral securing the transaction or goods subject to a consumer lease, or materially impairs the customer’s ability to pay amounts due under the transaction.
As a matter of practice, most creditors will permit a ride-through, and there are two major reasons for this. First – if a debtor is willing to continue make payments on a secured debt, they’re going to receive more money if they permit the ride-through rather than immediately demanding turnover of the collateral. If the debtor defaults, they still have a right of recovery and sale later on. (For example, if collateral is worth $10k at auction and a debtor makes $500/mo payments for a year before defaulting, the creditor potentially gets $16k out of the deal; whereas they only get the $10k if they repossess immediately.) The circumstances in which a creditor may not want to wait for a default is where there is significant risk or danger that the property will be damaged or wasted before the default, significantly devaluing the asset by the time it can be sold.
Stated another way, the Chapter 7 discharge is “good against the world,” including unscheduled creditors. The discharge is said to be good against the world in the sense that it applies to all unscheduled debts except those that are expressly made nondischargeable by § 523. In re Guseck, 310 B.R. 400, 402 (Bankr. E.D. Wis. 2004).
- Talk to the lender. Ask them to report your payments. (This works better with smaller local banks and credit unions than it does with the big banks.) If the creditor failed to provide you with an agreement – tell them that you would have signed the agreement if they had drafted one. Since they chose not to, it’s hardly fair to punish you for their inaction.
- Refinance. This is going to be difficult without the payment history to help rebuild your credit. If you’re refinancing with the same lender – many of them refuse to refinance because of the lack of the reaffirmation agreement (which is really stupid, because with the refinance, they have a legal claim to the money; without it, they do not).
- Dispute the lack of reporting with the credit bureaus. This has been suggested by a few attorneys. Gather evidence of all of your post-petition payments and send them in to TransUnion, Experian, and Equifax. Explain that your payments haven’t been reported because a reaffirmation agreement was not filed. The problem with this approach is that – if you’re disputing a credit reporting error – there’s no error to correct. Again, FCRA only requires that creditors report accurately, it does not require them to report at all. Even if the credit bureaus do amend your report to show the payments, it still doesn’t mean that your lender will report payments going forward, which means that you will have to continually update the bureaus yourself.
It’s worth pausing to note that, unlike stay violations, which have a clear statutory basis for the recovery of damages – 11 U.S.C. § 362(k) – there is no such provision in § 524. To receive awards and sanctions in a discharge violation, you must invoke the court’s general powers and authorities in § 105 and case law. The standard of proof is ‘clear and convincing’ evidence. And if the violating creditor is the IRS – administrative remedies at 26 U.S.C. § 7433(3) must first be exhausted.
- The maximum amount that can be garnished is 20% if your “disposable earnings” (your gross wages, minus amounts taken out for federal tax, state tax, and social security taxes, but does not include other deductions such as insurance or union dues). If you have child support deducted from your paycheck, then the combined amount of child support deductions and the wage garnishment can be no greater than 25% of your disposable earnings.
- Garnishments typically last for 13 weeks. They can end sooner if the underlying debt is fully paid. They can be extended for a longer period either by stipulation, or by a new application that takes effect after the first 13 week period is up. Also, public employees can be garnished until the debt is paid off.
- You can only be garnished by one general creditor at a time (does not include tax levies, federal student loan levies, and child support).
- You cannot be fired solely because of a wage garnishment (though most employment in the United States is “at-will” employment, which means an employer can fire you for any reason or no reason at all, so long as it is not solely for a discriminatory reason). There is also an exception to this rule if you have a collective bargaining agreement that permits termination under such circumstances.
- You may dispute a wage garnishment. To do so, click here for the form. Send a copy to the Clerk of Courts, the creditor and/or the creditor’s attorney, and your employer. Your employer must not garnish you if you file one of these responses, unless and until the court overrules your application and directs the employer to proceed with the garnishment. Your employer must wait at least 5 days after your pay date before sending garnished funds to the creditor, to allow time for you to file a dispute.
- Most creditors cannot touch certain types of income (such as social security). However, if you owe debt to the government, social security and other types of income can become fair game.
- You have filed bankruptcy and the automatic stay is still pending. (In pending Chapter 13s, only until property of the estate revests back to you.)
- You have received a bankruptcy discharge, and the debt was incurred before your bankruptcy case was filed.
- Your household income is below the federal poverty guidelines.
- If your household income is above the federal poverty guidelines, but the garnishment would bring you below the guidelines, you can only be garnished to the extent that it brings you down to the poverty guidelines.
- Currently, or in the past six months, you have received – or determined to be eligible for – public assistance (food stamps, W2, SSI, etc.).
File date to file date, but look at the type of discharges received. 7 to 7, 8 years; 7 to 13, 4 years; 13 to 7, 6 years; and 13 to 13, 2 years.