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  1. #1
    Join Date
    Dec 2014
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    Default What Happens if a Large Debt is Forgiven During Bankruptcy

    My question involves bankruptcy in the state of: CA

    I am 38 months into my 60 month chapter 13 plan, over median income filer. I recently received a notification that my $150K second mortgage is going to be 100% forgiven in early 2015 by BofA due to an agreement between them and the Dept. of Justice, with no penalties to my credit (which is shot anyway, so that doesn't matter much). Since this debt is part of a Title 11 bankruptcy, my understanding is that I will not be liable for any income taxes from a 1099C due to the debt forgiveness (so it will not be treated as 2015 income). This debt is a major part of my BK, and I am looking at early discharge options. The remaining unsecured debt on my BK is about $60K.

    I have three questions -
    1) if I get the verification that my 2nd is 100% forgiven in January 2015, and then end my Chapter 13 BK early in March, will I still remain exempt from that debt forgiveness being taxed as income since at the time it was forgiven, it was still in a Title 11 BK, or for that to remain valid do I need to stay in the BK til the end?

    2) Although ending my BK early may cost me about $20K extra overall to pay off everyone 100%, I am looking at accepting a new job that will bump my income up and overall make up for that extra amount over the time left in my plan. However, if I take the new job and choose to not end my plan early, I am worried that I will not get a new payment plan similar to the one that the trustee agreed to the first time around. It's a hard plan, but we have become familiar with our budget and what we need to spend and are comfortable with it. If they revise it due to my new possible net income and our for some reason our budgeted income after BK payment decreases, it will be stressful. Without the 2nd mortgage in the bankruptcy, can I just borrow from my 401k to just pay off the BK, and pay the creditors in full (or possibly see if they will negotiate for a 75% lump sum payment since right now they will only get about 50% if I stay in the plan)?

    3) During negotiations with the new possible job, they offered a higher salary option with no bonus, or a lower salary option with a sizable project completion bonus (higher risk, higher payout) that would be paid out at the end of the work in ~2 years (which would place it outside the 5 year bankruptcy plan I am in). If I choose the latter and stay in the BK, would that project completion bonus (provided it is paid out) be 100% mine if it is paid out after my BK closes about 2 months prior? If the project completes 3 months early and the bonus is paid out the month before my payment plan ends, would it be forfeit?

    Just things I've been chewing over due to this new job option. Thanks for your feedback!

  2. #2
    Join Date
    Sep 2005
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    98,846

    Default Re: What Happens if a Large Debt is Forgiven During Bankruptcy

    If you want to see if your debt is covered by the just-renewed Mortgage Forgiveness Debt Relief Act such that the forgiveness is not a taxable event -- and it sounds like it would be -- you should review IRS Publication 4681. If there's no tax liability, at least on that issue the question of whether or not you continue your bankruptcy becomes moot.

    With an increase in your wages and the removal of your most significant debt, it's reasonable to expect that your plan would be adjusted based upon the significant resulting change in your discretionary income. The trustee or a creditor can request a change to your repayment plan, and the court can also initiate a review of the repayment plan.

    With the completion bonus being a fixed amount, paid on an agreed schedule based upon your performance during that period, and being offered as an alternative to a higher wage, you may find that creditors or the trustee question its characterization and timing.

    Frankly, you should discuss the details of your situation and your possible compensation with your bankruptcy lawyer and get advice based upon the specifics of your case.

  3. #3
    Join Date
    Oct 2006
    Posts
    16,474

    Default Re: What Happens if a Large Debt is Forgiven During Bankruptcy

    Quote Quoting Mr. Knowitall
    View Post
    If you want to see if your debt is covered by the just-renewed Mortgage Forgiveness Debt Relief Act such that the forgiveness is not a taxable event -- and it sounds like it would be -- you should review IRS Publication 4681. If there's no tax liability, at least on that issue the question of whether or not you continue your bankruptcy becomes moot.

    With an increase in your wages and the removal of your most significant debt, it's reasonable to expect that your plan would be adjusted based upon the significant resulting change in your discretionary income. The trustee or a creditor can request a change to your repayment plan, and the court can also initiate a review of the repayment plan.

    With the completion bonus being a fixed amount, paid on an agreed schedule based upon your performance during that period, and being offered as an alternative to a higher wage, you may find that creditors or the trustee question its characterization and timing.

    Frankly, you should discuss the details of your situation and your possible compensation with your bankruptcy lawyer and get advice based upon the specifics of your case.
    Just as an FYI. Even though the cancelled debt from the second mortgage will be excludable from taxation, it still has to be reported on your tax return and then excluded using form 982. Its important that you do that or you will end up getting a CP-2000 letter from the IRS asking for big bucks.

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