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RI Bankruptcy Law: Discharge vs Debt Cancellation

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RI Bankruptcy law is complex.  If you are drowning in bills, make sure you understand the difference between cancellation vs discharge in bankruptcy.  If you make the wrong decision, you may end up with a large income tax obligation.

First, what is debt cancellation?  Debt cancellation is when a a creditor loses hope of ever getting paid.  For business reasons, they decide to stop chasing you.  They may decide to sell your account to a collection company for a few pennies on the dollar, but they are essentially “writing you off.”

For the debtor who has been pursued for collection, a creditor’s decision to cancel the obligation may sound like good news.  What’s not to like about a quiet telephone and no harassing bill collectors?

Here is the bad news.  When a creditor cancels your obligation, they often file a Form 1099-C (Cancellation of Debt) with the IRS.  The canceled amount is then treated as regular income.  In other words, you are about to get hit with a big tax obligation.

This is the last thing a person struggling with bills ever thinks about when calling a debt settlement company.  “You mean to say, I can settle my credit card bills and still end up owing the IRS?”  Yes!  It reminds me of the  famous movie line, “just when I thought I was out, they pull me back in.”

Imagine successfully negotiating the cancelation of $ 50,000 of debt.  If you are in the 25% income tax bracket, you could end up owing $ 12,500 in income tax.  Not good.

A bankruptcy discharge under RI Bankruptcy Law, however, is much more powerful.  According to the United States bankruptcy code, discharged debts are NOT the same as canceled debts.  A discharged debt is not treated at taxable income.  Very good.

But what happens if a creditor files a Form 1099-C on a debtor who has filed for RI bankruptcy relief?  While this should be confirmed with your CPA, the solution is found in IRS Form 982.  This form should negate the usual effect of a 1099-C.  In other words, Form 982 allows a debtor who has filed for bankruptcy relief, to exclude from gross income the debt discharged in bankruptcy.  It will not be treated as taxable income.

As you consider how best to solve your present financial dilemma, be very skeptical of any debt settlement company promising to make your creditors “an offer they can’t refuse.”  In many cases, you will be walking yourself into an income tax nightmare.  Don’t pay anyone to help settle your debt without first understanding the protections available under RI Bankruptcy law.  Bankruptcy law is just more powerful.

(As a footnote, the Mortgage Debt Relief Forgiveness Act of 2007 may absolve a homeowner from paying income tax on canceled mortgage debt if it is on their primary residence.  While this law won’t prevent a bank from suing you for default,  it will make the canceled mortgage debt a non-taxable event.)

Filed Under: Blog, Personal Finance, Rhode Island Bankruptcy Articles Tagged With: Bankruptcy, bankruptcy abuse prevention and consumer protection act, bankruptcy lawyer, business, debt, debt cancellation, debt discharge, debt settlement, economics, finance, income taxes, insolvency law, internal revenue service, Mark Buckley, mortgage, Rhode Island, RI bankruptcy, united states bankruptcy law

RI Bankruptcy Law: Giving To Charity While Bankrupt

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Charitable giving is a way of life for most Americans. Per capita, we are more generous than any other nation.

But who are the most generous in our country?  Individuals or businesses? I thought for sure it would be large corporations because they have the most money. I was wrong.

Individuals are responsible for over 75% of all charitable giving. More surprising still is that the poor give a higher percentage of their income to charity than the rich.

Most of this charity involves donations, tithes and offerings for spiritual or religous purposes. Churches, synogogues and other houses of worship are the biggest recipients of these charitable gifts.

This leads to a frequently asked question by my clients looking to file bankruptcy in Rhode Island. Will RI bankruptcy law prevent a debtor from making charitable contributions?

[Read more…]

Filed Under: Blog, Personal Finance Tagged With: Bankruptcy, bankruptcy abuse prevention and consumer protection act, bankruptcy court, bankruptcy expert, Chapter 13, charitable conftributions, Mark Buckley, Rhode Island, Rhode Island bankruptcy, Rhode Island bankruptcy law, Rhode Island Chapter 7, RI bankruptcy, social issues, title 11, united states bankruptcy law

Filing Chapter 7 Bankruptcy in Rhode Island: Not A Moral Issue

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I don’t know anyone in Rhode Island who thinks filing for bankruptcy   is taking the easy way out.  I’ve yet to converse with anyone who wanted to file a Chapter 7 bankruptcy as a way to cheat credit card companies, or to seek revenge for high interest rates.

Who Files Bankruptcy in Rhode Island?

My clients come from from every part of Rhode Island.  They are young, old and all the stages in between.  Some have little schooling, while others have college degrees including masters and doctorates.  What I have encountered are trustworthy, diligent people who feel trapped by too much debt.

They want to do the right thing and repay their debt, but they simply can’t.  With so much debt, they are stuck.  They are unable to move forward.

Family welfare and personal health soon begin to suffer.  With overwhelming guilt, these people have become slaves to their debt and are afraid to ask for help.  They believe others will judge them as immoral for filing a Chapter 7 bankruptcy.  Despite their best efforts, they are going over the financial waterfall and there is no catching up.

Many things can prevent an honest debtor from paying his bills: job loss, a medical crisis, a loss of overtime at work, a divorce, a change in interest rates. Any one of these events can send a person running to a bankruptcy lawyer, dejected and embarrassed.

Is Filing Bankruptcy A Moral Issue?

So when did filing bankruptcy become a moral issue?  Because most Americans come from a Christian or other strong spiritual tradition, we value honesty and integrity in our personal and business dealings.   We may even be familiar with a verse in the Old Testament book of Psalms which says, “The wicked person borrows but does not pay back.”  Does this suggest that all debt must be repaid, no matter the circumstance?

[Read more…]

Filed Under: Blog, Personal Finance, Rhode Island, Rhode Island Bankruptcy Articles, Rhode Island Chapter 7 Tagged With: Bankruptcy, bankruptcy abuse prevention and consumer protection act, bankruptcy laws, bankruptcy lawyer, bankruptcy lawyers, debt, file bankruptcy, filing bankruptcy in Rhode Island, Personal Finance, Rhode Island, Rhode Island Chapter 7

RI Bankruptcy Law:Preparing to File a Chapter 7 Bankruptcy

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Bankruptcy is never anyone’s first choice.  But, if you live in Rhode Island and are drowning in debt, there are some simple steps you should take TODAY to prepare for the possibility of a Chapter 7 bankruptcy.  Here are just a few ways to make life less stressful for both of us.

Stop the insanity.  Do not use your credit cards anymore for anything . . . . including everyday living expenses.

  1. If we work together, I must know about every purchase made in the past 90 days.
  2. You should make no less than 3 payments after a major purchase, cash advance or balance transfer. Depending on your circumstances, I may advise making a few more payments, or waiting a few months before filing your case.
  3. Keep away from your 401k plans and other retirement accounts.  A recent distribution may jeopardize your case.
  4. Don’t get clever with your property.  You cannot take your name off of deeds to real estate, or other valuable property without causing major problems.
  5. Obtain your income tax records for the past two years.
  6. Gather copies of all pay-stubs for the prior 6 month period.  Continue to collect them going forward.
  7. Be private. Do not divulge your plans to any debt collector.  They may decide to go after your bank accounts now if they think you are filing bankruptcy next month.
  8. Keep paying on your house and car if you intend to keep this property.  You should try to get current on these obligations before filing your case.
  9. For homeowners, perform a title examination.  I need to know if there are judgment liens against any real estate.
  10. Don’t play favorites.  You should not pay more than $ 200 back to friends and family members in the past year.
  11. Be prepared to disclose all property that you may have any interest in.  Is your name on a parent’s bank account, or real estate?  Are you owed money by anyone for any reason?
  12. Request your free credit reports at http://www.annualcreditreport.com to identify all creditors.
  13. Start saving money for your Chapter 7 bankruptcy case.  Although I provide a free telephone consultation, I cannot file your case until all fees are paid in full.
  14. Call me TODAY with all of your questions.  I will give you my honest assessment, then you will understand what needs to be done to get out of debt once and for all.

Filed Under: Blog, Rhode Island, Rhode Island Chapter 7 Tagged With: Bankruptcy, bankruptcy abuse prevention and consumer protection act, business, cash advances, credit, credit cards, credit counseling, debt, file bankruptcy, finance, for a, insolvency law, Mark Buckley, Personal Finance, practical advice, prepare, preparing, real estate, reduce stress, reducing stress, Rhode Island, Rhode Island bankruptcy, Rhode Island Chapter 7, RI bankruptcy, title 11, united states code

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