For BOTH Homeowners AND Investors There is a very common misconception out there about the tax consequences after foreclosure. It goes something like this: tax liabilities are inevitable for a property owner (either a Homeowner or an Investor) and that if a property goes through foreclosure, there may be less potential tax consequences to deal with as opposed to the property being sold through a Short Sale. This misconception is causing many property owners to make decisions (for instance – not proceeding with a Short Sale that actually would be in their best interest) that could literally cost them thousands of dollars or throw them into bankruptcy. While there is no question that any type of debt forgiveness can trigger a 1099, the 1099 after a Short Sale and the 1099 after a foreclosure can be handled in such ways as to effectively minimize the actual tax paid on the debt cancellation amount and in many cases handled correctly there will be no tax payments necessary.

I will first start off by saying that I am not a tax attorney or an accountant. So for a complete understanding of the following concepts, I would recommend seeking professional advice. What I am writing is based upon my reading, understanding and discussion of the legislation and of the IRS publications that are commonly available. I will include links to those documents for those of you that are interested in understanding this topic better.

In the early part of the foreclosure crisis, Congress enacted legislation called ‘The Mortgage Debt Relief Act of 2007′. The main part of this legislation was directed at the primary residence homeowner. Following this legislation, it became widely believed that only the primary residence homeowner received tax relief from a 1099 received after foreclosure or after Short Sale. What this misconception overlooked is that the tax liability following the receipt of a 1099 could still be effectively reduced by other provisions in the tax code that deal with issues of insolvency. Many Investors felt dismay and became quite forlorn when they felt that their underwater single family house purchases were ‘going down’ and dragging them with them. Not only that, when all was said and done they feared that they would be hit with big 1099′s and resulting big Income Tax payments in the following years that would throw them into bankruptcy. Why wouldn’t they? After all many of these small portfolio investors were usually good people who never missed a payment on anything in their life and had no prior reason to consider or understand anything about the meaning of insolvency.

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These days, many large companies and well known multimillionaires have filed for bankruptcy. Given the current economic scenario and the ever increasing bankruptcy filings, it has become necessary to understand what bankruptcy stands for. In simple words, bankruptcy refers to the legal procedure which deals with the debt issues of an individual or an organization. There are various types of bankruptcies classified under different chapters and sections. Of these, Chapter 13 is one type of bankruptcy that has become quite predominant in recent times. In this article, you will learn about this chapter in detail.

Chapter 13 Bankruptcy permits the debtor to repay his debt over a stipulated span of time. The repayment has to be made regularly usually over a period of three to five years. This type of bankruptcy has become popular, as the debtor is not required to sell off his properties and assets to repay the debt to his creditors. Chapter 13 Bankruptcy is technically referred to as the Individual Debt Adjustment. It is also known as a wage earner’s plan. Under this chapter, debtors with a regular source of income are allowed to develop a suitable arrangement to repay their debts. This chapter prevents liquidation of property which is quite common while filing for Chapter 7 bankruptcy. Moreover, it enables the debtor to reschedule his secured debts. Therefore, the debtors find it easier to lower the payments he is expected to pay back.

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