Michael H. Raichelson Bankruptcy Law Blog on Lawyers.com

According to Los Angeles Bankruptcy Lawyer Michael H. Raichelson, if you owe a debt to someone else and they cancel, reduce or forgive that debt, the canceled amount may be taxable.  If you borrow money and the lender later cancels, reduces or forgives that loan, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances.  This is the dirty little secret that debt consolidation companies will not tell you.  When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or reduced, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender.

Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000.  The debt consolidation company works out a deal and the lender cancels $7,000 of the loan while only requiring you to pay back $1,000 more.  There is cancellation of debt of $7,000, which generally is taxable income to you.  At the end of the year you will receive a 1099 from the lender indicating that you earned $7,000.  By that time, the debt consolidation company has taken your money, and you end up owing Uncle Sam approximately $2,000 in income taxes. 

This result will be avoided if the debt is eliminated through bankruptcy.  Do not be fooled by these debt consolidation companies. 

You should not feel guilty about filing bankruptcy. Whatever the circumstances that have made it difficult for you to meet your obligations, it is better to seek relief in bankruptcy and return to a productive life than remain struggling with out-of-control debt. Come talk to us about your financial issues; we can help!

Take the first steps today to liberate yourself from debt! Contact Los Angeles Bankruptcy Attorney Michael H. Raichelson at 866-912-2669 for a free consultation. At the Los Angeles Bankruptcy Law Offices of Michael H. Raichelson, our fees are flexible, and under certain circumstances you can make payments over time.

The Law Offices of Michael H. Raichelson is a debt relief agency as defined by the United States Bankruptcy Code.