What is a personal debt obligation?
A personal debt obligation is an amount of money legally owed to a lender that arises from a loan agreement. It implies a continuing obligation to make payments until the debt is paid in full. A lender has the right to sue to collect any unpaid debt. A debt obligation can be insured Prayed Unsafe. HAS insured Debt obligation involves placing a lien against the debtor’s property, so a lender can force the sale of the property to pay off the debt. Year Unsafe The debt obligation is unsecured against the debtor’s property, which means that a lender can only sue the debtor personally to recover money owed.
What is debt forgiveness?
Debt forgiveness is the forgiveness of all or part of a debt. It means that you no longer owe the debt to the lender or to any other party. The lender waives his rights to collect the debt and instead “writes off” it from his books. Once a lender agrees to forgive a debt, the lender will report the forgiveness to the IRS by filing a 1099 form.
What is a deficiency debt?
Deficiency debt, also known as deficiency debt, arises when the collateral used to secure a loan cannot satisfy the full amount owed on the loan. It occurs most often with debts related to real estate. However, it can occur on other types of secured loans, such as auto, business, and equipment loans. When a loan is not paid, the lender has the right to auction the property to pay off the debt. If the lender collects less than what is owed on the sale, the shortage is called a debt deficiency.
What are the consequences of a Personal Debt Obligation?
You will continue to owe the original amount borrowed plus any additional interest, late fees, collection fees, penalties, and/or attorney fees that may be owed. If the debt obligation remains unpaid, then the lender can go to court, sue for a money judgment, get a money judgment, and use any legally available collection tactic. Most of the time, after a money judgment is granted, a lender will attempt to tax a bank account or garnish wages or encumber the debtor’s real property. A lender can put a link in the commercial team. A debt obligation that becomes a money judgment can last for many years. In New York, a concept of money lasts 20 years.
What are the consequences of Debt Forgiveness or Debt Deficit?
Whether it is debt forgiveness or debt deficiency, the consequences are essentially the same. A lender has two general options with respect to any unpaid debt. 1. The lender can forgive the debt. 2. The lender can obtain a court-ordered money judgment to go after the borrower for the money or sell the debt to a third party.
If a lender agrees to forgive the debt, the lender will, in all likelihood, file a 1099 form for the forgiven amount. He should also remember to check with his state’s taxing authority, since his state may treat debt forgiveness as taxable income. If the debt is secured by property, it is possible to negotiate an exchange of the property for the full balance of the debt. In this case, the lender would have no reason to file a 1099 form.
If the lender refuses to forgive the unpaid portion of a debt, the lender will attempt to collect the remaining balance. The lender can hire a lawyer to sue for the remaining debt or sell the debt to a third party. If you are successful, the lender will obtain a money judgment. There are several methods that a lender can use to enforce the collection of a money judgment. They may request your financial records to see if you have a job; to determine if you have cash in the bank; or to locate your property. If the lender can find anything you own or earn, it will be seized or repossessed. The lender has the right to collect a fixed percentage of your wages, also known as a wage garnishment. By the way, the lender does not need your permission to garnish your wages. The lender simply contacts the payroll department and demands that a portion of your salary go to the lender.
When there is a debt deficiency from the sale of a property, the lender may forgive the difference or try to collect the difference. A deficiency debt becomes a new personal debt obligation unless a lender forgives the deficiency. Sometimes a lender will require a property owner to sign another loan agreement for insufficient debt. The IRS and some states offer tax relief to homeowners who have had their deficiency debt forgiven. More information about tax relief is provided later in this FAQ.
In our day and age, debt collection is big business. Technology makes it easier to find anyone and find everything a person earns or owns. There are third-party companies that purchase personal debt obligations and/or deficiency debt from lenders. These third-party companies can pay 10 to 20 cents on the dollar for the debt. Once the third party company owns your remaining debt, in most circumstances the third party has the same collection rights as the original lender.
Why does a lender issue an IRS 1099 after debt forgiveness?
Debt forgiveness is considered taxable income by the IRS and by certain state and municipal taxing authorities. The IRS requires a lender to report the forgiven debt on Form 1099-C, Cancellation of Debt. Individuals must report any debt forgiven on Form 1040. For example, let’s say Mr. Jones originally borrowed $250,000 from the lender. The lender decides to forgive $150,000. Basically telling the debtor that he doesn’t have to pay $150,000. The IRS believes that since he did not have to repay the loan in full, he ended up keeping the money, therefore it is income.
What if I own a property worth less than the balance on the mortgage, can the difference be forgiven through a short sale or foreclosure auction? Can the difference become a deficiency debt? Will the IRS allow me to exclude the forgiven debt and not count it as income?
The general answer is yes to all questions. If a lender agrees to a short sale, the uncollected difference may be forgiven or may become a personal debt obligation. If the lender forgives the difference, then the forgiven amount may be considered taxable income. If the lender refuses to forgive the difference, then it becomes a personal debt obligation. This means that a lender or third party (who buys the lender’s debt obligation) has the right to legally pursue you by obtaining a court-ordered money judgment.
If your home ends up selling at a foreclosure auction for less than what is owed, the uncollected balance is called a deficit debt. A deficiency from a foreclosure action may be forgiven or may become a personal debt obligation. Several states have deficiency statutes. These statutes prevent a lender from collecting a deficiency. In addition, the federal government enacted the Mortgage Debt Relief Act of 2007. The Mortgage Debt Relief Act of 2007 allows taxpayers to exclude income from paying off debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for relief. The law applies to all applicable debts forgiven between 2007 and 201. Applies up to $2 million for joint filing and $1 million if filing separately. Be sure to read the law and get a qualified tax professional to discuss your specific situation.
The IRS has additional exceptions to the “debt forgiveness is income” rule. The most common situations in which the cancellation of debt income is not taxable involve qualified indebtedness of the principal residence, bankruptcy, insolvency, certain agricultural debts, non-recourse loans and other exceptions established by the IRS . You should speak with a qualified accountant or other professional so that you understand your tax obligations.
What are the Anti-Deficiency Laws?
Simply put, an anti-deficiency law prevents a lender from collecting a bad debt or sets limits on how much a lender can collect on a bad debt. An owner will not be responsible for any deficiency if the property is owner-occupied. Basically, the property must be the owner’s primary residence. The lender can only repossess the property and any proceeds from a foreclosure auction.
The deficiency laws do not prevent a lender from reporting the deficiency to the IRS. Since the lender generally cannot collect on the loss on a sale, the lender can report the loss to the IRS as a forgiven debt.
You can contact your state’s attorney general or banking department for information on deficiency laws. You can contact a qualified lawyer. There are certain states that limit a lender to a single demand to collect a home loan debt. So be sure to get a professional opinion on the laws in your state.
What happens if I pay off a credit card or business loan for less than what is owed?
If properly negotiated, a credit card company or lender may agree to settle a business loan or credit card debt. Normally, the unpaid balance must be forgiven. This brings up an important principle. To get debt forgiveness, it must be in writing!! Keep this in mind. Just because the lender verbally tells you the debt is forgiven doesn’t mean it’s forgiven unless it’s in writing. There are cases where a debtor is told the debt is forgiven only to receive aggressive collection calls in the future.
How can I determine what is best for me?
Ask yourself “What am I trying to achieve, what are my goals?” Your answer should focus on what puts you in the best financial position in the short and long term. The focus should be on reducing your debt obligation with limited long-term negative financial impact. If the debt is forgiven, you may have a tax bill. If the debt becomes a money judgment, then wages may be garnished or certain assets may be garnished. You will either need a qualified team of professional advisors to help you or you will need to do a fair amount of research. Your advisors may include an accountant, lawyer, and/or consultant.
Each person’s circumstance is unique. It requires spending time listening, gathering detailed financial information, reviewing all the necessary documents, and discussing various strategies.
Now you know, so take control.