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Some lenders tried collecting from displaced homeowners after foreclosures and short sales failed to cover what the borrowers owed. The Mortgage Forgiveness Debt Tax Relief Act of allowed taxpayers to avoid recognizing this income, and having to pay taxes, on debt forgiveness related to their primary residence.

To get forgiveness, though, homeowners typically had to go through the hell of losing their home and suffering severe damage to their credit scores. You have to be pretty hard up for the IRS to give you a break, though, since the agency has so many ways to collect. The IRS can hold on to your refund, take a chunk of your pay, put a lien on your bank account, seize and sell your property, and revoke your passport.

If you do have assets, the IRS expects you to sell them and send it the money. That includes homes and retirement funds, even if tapping those funds would generate taxes and penalties, she says. To submit an offer in compromise, you also have to bare your financial soul. You must disclose the value of all your major assets, sources of income and expenses, says Mark Luscombe, principal analyst for tax and accounting at Wolters Kluwer, an information services company.

Many people who have trouble paying their tax bills would be better off asking the IRS for an installment plan, Weston says.

The Collapse of The American Dream Explained in Animation

NerdWallet adheres to strict standards of editorial integrity to help you make decisions with confidence. Some of the products we feature are from partners. Sometimes individuals file for Chapter 13 only to find out they must convert it to a Chapter 7. Also, there are monetary limits to the amount of debt you can have in a Chapter If the plan passes muster with the court, then all disposable income is given to the trustee, who keeps a percentage as a fee and parcels out the rest to the creditors in accordance with the plan.

Even though it lingers longer, Chapter 13 is kinder on the credit score than a total liquidation, says Ulzheimer. The credit report should reflect that loan balances are decreasing and the creditor is making an effort, Ulzheimer says. At the end of any bankruptcy, you might receive a form from creditors listing your discharged debt as unreported income, says Weil. But debts discharged in bankruptcy do not count as income, he said.

Slow and Steady Wins the Debt Race

If the IRS asks, supply the documentation that shows the form resulted from a bankruptcy. Instead the term refers to filing a Chapter 7 followed by a Chapter 13 the sum of which is 20 , says James R. The purpose of the second filing: More common is that individuals get into debt again within six years of a Chapter 7 and end up filing a Chapter Creditors have the right to object and the judge can toss the action, says Greer.

Some judges will allow the second filing, provided there is a legitimate reason.

The Danger of Fixing Symptoms

Get a good attorney If you are considering bankruptcy, this is no time to go it alone. You need an experienced lawyer who specializes in bankruptcy to navigate the federal laws, state laws and tax consequences. Your future lifestyle hinges on getting the best advice and making the smart choices. If you decide to file, you definitely need an experienced bankruptcy attorney. Steer clear of petition preparers, typing services or paralegals, says Sommer.


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And if you are even considering filing on your own, remember the old adage that a man who acts as his own attorney has a fool for both an attorney and a client. How else did most people get by?


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I probably could have learned some helpful new behaviors around money without changing these attitudes — how to use a budget, how to set up an emergency fund, and the like. But without a serious attitude adjustment, I doubt I would have been interested. A psychiatrist friend tells me that attitudes and behaviors work in circular fashion to bring about change.

Mistakes to Avoid

Behavioral changes tend to alter our attitudes, and attitudinal changes tend to alter our behavior. While we may be able to force ourselves into some short-term behavioral changes, attitudinal changes take time. To be sure, getting out of debt requires behavioral changes. You need to stop going any further into debt. You also need to gather the facts.

How much debt do you have?

Why Debt Forgiveness Isn’t What It Seems - NerdWallet

Write it all down, and add it all up. Create a cash flow plan AKA, a budget. Then start rolling a debt snowball. However, getting and staying out of debt also requires the slower work of heart change. Start by taking a close look at your financial attitudes.

Lasting Changes Require Changes of the Heart

Are there any ways of thinking that have contributed to your debt? One of the key attitudinal factors that helped me turn things around was accepting responsibility for my debts. I was responsible for my debts. To be sure, some people with debt problems have gotten into financial trouble by way of horrendous life circumstances. A divorce, an extended period of unemployment, catastrophic medical bills. It took time to change my money-related attitudes and cultivate some healthy financial habits.