Houston Bankruptcy Attorney Alex Wathen warns people about foreclosures and short sales as the mortgage lender often sends a Form 1099 making it a non-dischargeable debt.
The widespread practice of sending Form 1099 to people who have had a foreclosure or a short sale benefits the federal government in terms of tax revenue. Now there are ways out of this such as filing for bankruptcy the same year as the foreclosure and in some other cases if you are insolvent you may get relief by filing a form with your tax return if you qualify, but the surest way to avoid it is bankruptcy. Surely a lot of people do not know this and end up paying the IRS money needlessly. Perhaps that is why Congress has not changed the tax laws to eliminate cancellation of debt as taxable income. It may also be a reason why Congress has not taken action to stop foreclosures by allowing bankruptcy courts to modify people’s loans. It is too bad that the federal government has no incentive to help people.
