If I fileChapter 7 and my home is foreclosed on, is the deficiency difference considered earned income on my taxes?

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If I fileChapter 7 and my home is foreclosed on, is the deficiency difference considered earned income on my taxes?

Asked on August 21, 2010 under Bankruptcy Law, Michigan

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

As a general rule, if the debt is forgiven--i.e., the lender writes off the remaining balance or deficiency and then does not try to collect it--then it is considered income. However, there are exceptions to every general rule. According to the IRS, debts discharged in bankruptcy are not considered taxable income. Therefore, if you have filed, the home is foreclosed upon, and as result of the filing, the bank cannot proceed against you for the deficiency (which is then functionally the same thing as having that debt foregiven), the deficiency is not considered taxable income. This is presumably so that the discharge is "real"--i.e. one debt (the discharged one) is not merely substituted for another (tax liability). Here is a link to an IRS webpage that you may find helpful, and good luck: http://www.irs.gov/newsroom/article/0,,id=174034,00.html


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