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Forgiven debts may lead to tax bills for some

| Nov 23, 2016 | Debt Relief |

Under some circumstances, people in North Carolina may have debts that they owe forgiven. For instance, a credit card company may agree to forgive a consumer’s debt after a certain amount of time or a settlement may be reached where the company agrees to accept a partial payment. However, the consumer may then be liable to pay taxes on the amount that was forgiven.

Since many people who have their debts forgiven are struggling financially, this may not seem to make a lot of sense. But, according to Money Talks News, there are a few exceptions to this rule. For example, if debts are forgiven or cancelled through either a Chapter 7 or Chapter 3 bankruptcy, those balances are generally not considered taxable.

In addition, if a person is having money problems and the amount that they owe is more than the total of their assets, that person is considered to be insolvent. If he or she is insolvent when the debt is forgiven, they can submit a form to the Internal Revenue Service and the balances that were forgiven will not be treated like income and will therefore not be taxable.

Finally, there is also an exception when it comes to housing debt. When foreclosures and short sales occur, any amounts forgiven by the lender would be considered taxable for the homeowners. However, in reaction to the recent housing crisis that occurred, the federal Mortgage Forgiveness Debt Relief Act of 2007 was passed. While that law intended to make mortgage debts that were forgiven tax-free on a federal level through 2014, the North Carolina Department of Revenue reports that it was extended for 2015 and 2016. However, earlier this year a bill was signed into law in North Carolina that made cancelled mortgage debt taxable once again on the state level.