Converting from Chapter 13 to Chapter 7: What’s Involved and Why Would You Convert?

Life inevitably changes and things happen that may cause a chapter 13 debtor to no longer need or afford their original chapter 13 plan. A job loss, other reduction of income or unanticipated increase in expenses can all be reasons for a debtor to lose their ability to continue making the chapter 13 plan payments. If the chapter 13 payments become unfeasible and, assuming the debtor qualifies, a chapter 13 case can be converted to chapter 7 for an immediate discharge.

Typically people file chapter 13 bankruptcy for one of two reasons: Either their household income is above the applicable state median income and they do not qualify for chapter 7, or they voluntarily elect to file chapter 13 due to having mortgage arrears, non-dischargeable taxes or other priority debts that can be repaid over the course of a chapter 13 plan. Also debtors may elect to file chapter 13 if they have non-exempt assets that would lose to liquidation by a chapter 7 trustee and instead chose to ‘buy back’ their non-exempt property by making monthly plan payments in chapter 13.

In cases converted to chapter 7 from chapter 13, the debtor must prove that they would qualify for chapter 7 as of the date of conversion (not the original file date) by passing the means test. See What is the “Means Test” and Why Does it Matter in Bankruptcy. The debtor’s bankruptcy attorney will complete a new means test as of the date of conversion to determine if the debtor is chapter 7 eligible. If eligible, the case can be converted by the debtor filing a motion to convert to chapter 7 which gives all creditors and other parties the opportunity to object. (Note that in Minnesota, no motion is required and the debtor can instead file a simple request to convert to chapter 7 along with updated schedules and statements). If the motion/request to convert is granted, the case will proceed as a chapter 7 case and the debtor will attend a chapter 7 Meeting of Creditors before a discharge is ordered.

If your income has gone down or your expenses have increased since your chapter 13 plan was confirmed, you should consult your bankruptcy attorney so she can advise you of what options you have to convert to chapter 7, to have your case dismissed voluntarily or otherwise to modify your chapter 13 plan to reduce the plan payment. Any missed chapter 13 plan payments will result in a quick dismissal of your chapter 13 case so it is important to notify your attorney immediately if you are considering a conversion to chapter 7 from chapter 13. Once a chapter 13 case is dismissed, the debtor will have to pay a significantly larger filing fee to file chapter 7 and also increased attorney fees over the typically smaller attorney fee for just a conversion.

Read more about converting from chapter 7 to chapter 13 bankruptcy here.

Condo, Townhome and HOA Association Liens in Minnesota

In Minnesota, if you have unpaid condominium or townhome association assessments—which are often called “HOAs”—these unpaid amounts operate automatically as a lien on the property under Minnesota Statute § 515B.3-116(a), which is part of the Minnesota Common Interest Ownership Act.

What a condo or townhome association lien typically means for the homeowner is that you cannot get out of paying past due HOA assessments while you own the property. Further, it means that the property can be foreclosed by the Association for unpaid homeowner’s association assessments even if you are current on your mortgages. Due to the financial risk of having unpaid HOAs, the Association’s Board of Directors will often opt to foreclose for lesser amounts and on quicker timelines than a mortgagee would typically foreclose an unpaid mortgage.

For the Association, the protection of an automatic Minnesota statutory lien on the property provides a high level of protection for the Association from accruing large amounts of unpaid HOA assessments for which the other members of the Association may have to make up via a special assessment. Unpaid HOA assessments can be collected upon against a unit owner via a lawsuit against the homeowner and very likely at the expense of the homeowner when the Association’s attorney fees are added to the statutory lien amount. Under the Minnesota Common Interest Ownership statute and likely under the Association’s declaration and bylaws, the automatic lien also includes other amounts and charges associate with collection efforts.

Additional to these legal remedies, many Minnesota homeowner’s declarations and bylaws include the provision that the Association may suspend the rights of any owner or occupant including their guests to use the common element amenities. This means that not only will that homeowner be denied their voting rights, but also that a homeowner’s right to use common amenities such as laundry, parking and other services may be suspended for the non-payment of HOA assessments and other charges due to the Association. Minnesota law does not usually allow for the Association to suspend utility services and physical access to the unit.

The best bet is to stay current on your Association dues and avoid any accrual of assessments, late charges and other fees. Bankruptcy may help you by discharging some amounts due to the Association, but the availability of bankruptcy relief for condo or townhome liens is often dependent on the individual circumstances and whether the owner intends to keep the property.

Located in Edina, Lynn Wartchow represents homeowners in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout Minnesota.

What Should I Expect at the 341 Bankruptcy Meeting of Creditors?

If you have done basic research into the bankruptcy process, you will know that about one month after filing a bankruptcy petition and schedules there will be a mandatory hearing called the “341 Meeting of Creditors”, which is named after the section of the Bankruptcy Code that requires the hearing.

Clients often ask what to expect at the Meeting of Creditors, what they should bring to the Meeting of Creditors and what creditors will be present at the Meeting of Creditors.

For most people, the Meeting of Creditors is relatively uneventful: it’s typically held at the federal courthouse in a hearing room with people who filed bankruptcy around the same date that you did and their attorneys, all waiting for their names to be called so they can sit for the few minutes of questioning by the bankruptcy trustee assigned to their case. When your name is called, you can expect to go up and sit at the hearing table across from the trustee, and then be sworn in under oath to tell the truth, to confirm your name and address and then to answer some basic yes/no questioning for several minutes. If you have fully disclosed everything to your attorney and on your bankruptcy schedules, there should be no surprises and nothing new that comes up during the Meeting of Creditors. In the vast majority of cases, the trustee’s job is routine and they blandly conduct this hearing to determine if there are any non-exempt assets and to get your required testimony on record.

What should I bring to the Meeting of Creditors? In Minnesota bankruptcy cases, you should plan to bring your driver’s license and social security card, all paystubs received since the date that your case was filed, and also a bank statement that confirms the balance in each bank account on the file date of your bankruptcy case. If the trustee wants more documentation, they will either request it at the Meeting of Creditors or from your attorney.

Who shows up at the Meeting of Creditors? Usually, just you, your attorney and the bankruptcy trustee are present for a Meeting of Creditors. It is rare that any creditor will appear for a Meeting of Creditors, even though all creditors will receive notice of the scheduled time and date at least 21 days prior to the hearing. However, the only creditors who typically show up are ex-spouses or ex-business partners that feel jilted by the bankruptcy or, in some rare cases, individuals who have something to reveal to the trustee that was may not have been fully disclosed in the bankruptcy petition and schedules. Rarely does an everyday unsecured creditor make an appearance at the Meeting of Creditors. Even if a creditor or other party-in-interest shows up for the Meeting of Creditors, they are only allowed to ask questions related to the information contained in the schedules and are not allowed to use the Meeting of Creditors as an opportunity to ask unrelated questions.

Many people understandably feel nervous about their upcoming Meeting of Creditors, and inevitably all feel much relief once it is favorably concluded without incident. As long as you have fully disclosed all information in your petition and to your attorney, and you have the required documents and IDs on the hearing date, then the Meeting of Creditors should pose no concern. If you still feel anxious, just ask your attorney to spend a little more time helping you prepare for the Meeting of Creditors and/or provide a list of the sample questions asked at the Meeting of Creditors.

Keep reading for the Typical Questions Asked at the Chapter 7 Meeting of Creditors

Wartchow Law Office is a bankruptcy law firm located in Edina, Minnesota with  an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law,  representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

The Fair Debt Collection Practices Act and How It Protects You

The Fair Debt Collection Practices Act (“FDCPA”) is pro-consumer legislation that was originally enacted in 1978 for the purpose of protecting consumers from the aggressive and sometimes abusive collection tactics often used by third party collection agencies. Among the its lengthy list of prohibited acts and conduct, the FDCPA makes it illegal for debt collectors including collection agencies, lawyers, forms writers and other third party collectors to do the following:

  • State information that is false, deceptive, or misleading
  • Threaten to take any action that cannot legally be taken or that is not intended to be taken
  • State that a legal process such as a lawsuit has begun when in fact it has not
  • Represent that collection documents have been authorized or approved by a court, official, or an agency of the government
  • Threaten to unlawfully repossess property
  • Claim that the consumer has committed a crime
  • Incessantly call on the phone or engage in repeated telephone conversations
  • Call the consumer at their place of employment when the collector knows that the employer prohibits such communications
  • Discuss the debt with a third person, such as an employer or family member
  • Call the consumer if they know they are represented by an attorney

There are several requirements that must be met before a consumer’s claim for an FDCPA violation arises, including that the underlying debt must have been incurred for personal, family or household purposes as opposed to for business reasons. Damages for successful FDCPA violations include up to $1,000 plus the cost of attorney fees for bringing the action. Additional damages may be available if the consumer can prove emotional distress or that they suffered an out of pocket expense due to the violation.

If you believe that you may have a claim under the FDCPA, you should tell your bankruptcy attorney about the claim as this could be a potential asset in your bankruptcy case.

Wartchow Law Office provides free bankruptcy consultations to discuss options in Chapter 7 and Chapter 13 bankruptcy in Minnesota as well as non-bankruptcy debt relief alternatives. Located in Edina, Minnesota, Wartchow Law Office represents clients throughout the Twin Cities of Minneapolis, St. Paul and surrounding areas.

What is the “Credit Counseling” Requirement to File Bankruptcy?

A credit counseling course must be completed before an individual can file bankruptcy. This course basically goes through your budget and educates on how to prioritize certain expenses, save money and manage a household budget.

While every individual who files for Chapter 7, Chapter 13 or even Chapter 11 bankruptcy is required to complete this credit counseling course before filing bankruptcy, this class is relatively simple and some even find it useful.

What you should know about the credit counseling course:

  • You can take the course online, over the phone or in person.
  • The course usually costs around $25 if you take it online or over the phone.
  • Once completed, you will be issued a Certificate of Credit Counseling, which you must provide to your bankruptcy attorney for filing with the court.
  • Have your attorney’s email address handy when you take the course so the agency can forward the certificate directly to your bankruptcy attorney.
  • A Certificate of Credit Counseling is only valid for 180 days. If you do not plan to file for bankruptcy for another six months or more, you may wish to hold off on taking the class until closer to the file date.
  • It must be taken from an approved credit counseling agency in Minnesota (for Minnesota bankruptcy filers).
  • You will also have to take a second course after you file bankruptcy but before you get a discharge. This second course is called “Debtor Education” or “Financial Management” and the process is similar to taking the first course. This second certificate must be filed with the bankruptcy court before you can receive a bankruptcy discharge. You do not have to take the second course from the same agency that you took the Credit Counseling.

A list of the approved Credit Counseling and Debtor Education agencies can be found on the US Department of Justice website at www.justice.gov/ust/eo/bapcpa/ccde/index.htm.

Lynn Wartchow represents clients in Chapter 7 and Chapter 13 in Minneapolis, Edina and Twin Cities Minnesota consumer bankruptcy proceedings. Consultations are free.

Common Reasons for Filing Chapter 13 Bankruptcy

For some people, the bankruptcy code and rules may dictate that you simply do not qualify for Chapter 7, in which case the alternative is to file Chapter 13 “wage earner’s plan”. However, there are reasons why someone may actually choose to file a Chapter 13 rather than Chapter 7, even when they have the option of filing for the more common “straight discharge” Chapter 7 bankruptcy.

Possible circumstances when you must file Chapter 13 (i.e., do not qualify for Chapter 7):

  • Your household income exceeds the applicable median income for the state of Minnesota and you do not have enough other certain expenses to reduce your disposable income in order to qualify for Chapter 7. If your income is too high, you will need to file Chapter 13 instead of Chapter 7. This calculation is determined by the “Means Test”.
  • Regardless of your household’s income level, you still have disposable income every month after payment of all your monthly living expenses. In Chapter 7, you cannot have significant disposable income or your case could be dismissed or converted to Chapter 13.
  • You filed a previous Chapter 7 within the last 8 years so you do not qualify for another Chapter 7 at this time. Chapter 7 can only be filed once every 8 years. Note: a previous discharge in any chapter of bankruptcy will prevent a discharge in subsequent bankruptcy filed within 8 years, meaning that if you file a Chapter 13 within 8 years after a prior Chapter 7, the new Chapter 13 plan must propose a 100% repayment to creditors (i.e., no discharge is allowed in less than every 8 years). Other bankruptcy protections and tools, such as the automatic stay and ability to repay mortgage arrears to fend off foreclosure, are still available in a subsequent Chapter 13 filed within 8 years after a prior Chapter 7 bankruptcy.

When you may choose to file Chapter 13 bankruptcy over Chapter 7:

  • You need to repay mortgage arrears and/or default payments on your car loan in order to prevent foreclosure or repossession of the collateral. In Chapter 13 bankruptcy, you can repay home mortgage arrears over 3 to 5 years in the Chapter 13 plan.
  • You have assets which would be non-exempt in a Chapter 7 filing and would either face surrendering or paying to keep if you filed Chapter 7. In Chapter 13, you can “pay to keep” any non-exempt assets over 3 to 5 years of a Chapter 13 plan.
  • You want to see that your creditors receive some money despite the bankruptcy and even if it means they still won’t get paid in full. Most Chapter 13 bankruptcy plans provide for the proportionate repayment of unsecured creditors anywhere from pennies on the dollar to 100%.
  • You have non-dischargeable debts that you want the flexibility to repay over five years with low or no interest.

Lynn Wartchow is a Minneapolis / St. Paul area bankruptcy attorney representing clients in Chapter 7 and Chapter 13 consumer bankruptcy proceedings in Minnesota since 2005. Call for a free bankruptcy consultation to understand your options in Chapter 13 bankruptcy.

Bankruptcy and Divorce: What Should Come First?

Divorce is often a precursor to bankruptcy, for either one or both of the divorcing spouses find themselves in need of discharging debts in the face of earning only a single income once again. The difficult question is determining what should come first: the bankruptcy or the divorce.

The answer of course depends on a multitude of circumstances including whether the spouses can cooperate and agree to a joint (and amicable) bankruptcy filing before the divorce is finalized, how long it may be before a divorce decree is entered, which assets owned jointly versus individually, whether there are any joint debts, how the incomes of each of spouse may affect a joint bankruptcy both during a bankruptcy proceeding and after the divorce is final.

When divorce and bankruptcy overlap, the first question is timing. Often family  attorneys may advise their clients to file a bankruptcy before finalizing the divorce, which has the optimistic effect of clearing up those debts so the divorce decree has one less thing to divide up between the spouses. However, there are reasons why it may be better to wait to file bankruptcy until after the divorce is complete, especially for debtors that may owe monetary obligations to their ex-spouse as part of the divorce decree. While child support and alimony (or maintenance, as it is sometimes called) that are based on the financial need of the other spouse are not dischargeable in bankruptcy, certain other financial obligations to one’s ex-spouse may be dischargeable in bankruptcy, including property settlements and other financial obligations that are not based on the financial need of the other spouse. Under some situations, these types of divorce decree obligations can be discharged in a Minnesota consumer bankruptcy filed under Chapter 13.

Another reason to wait to file bankruptcy until after a divorce is finalized: a divorce decree can slap a debt back on one spouse, effectively mooting the entire reason for filing bankruptcy. In Minnesota—which is not a community property state—one spouse typically cannot be held liable for debts incurred solely by their spouse unless both spouses signed the credit agreement (there are some exceptions, such as medical debts which can be enforced against one’s spouse under state statute). A divorce decree usually divides all debts amongst the spouses. For example, the husband may assume the entire responsibility for all joint  and individual credit cards in his name while the wife will take over the homestead and accompanying home mortgages and individual credit cards in her name. If the husband files bankruptcy before the divorce is finalized and discharges his legal responsibility to his credit card companies, the divorce decree can still subject the husband to responsibility to his wife for any payments she is forced to make on the joint credit cards that she will still owe in spite of his bankruptcy because she did not file with him. In this example, while the credit card companies could not sue the husband because of his discharge received in bankruptcy, however they could still sue the wife for the joint debts and the wife, in turn, can then sue her ex-husband for indemnification under the divorce decree if she is forced to pay on the joint credit card debts that were otherwise assigned to him. The point is that you never know how the debts will be divided until the stamp is dry on the divorce decree, and you don’t want to waste a bankruptcy discharge (which you can only get once every 8 years) on debts that may be re-assigned to you in the divorce.

Other issues to be considered when bankruptcy and divorce intersect: equity in a  homestead may not be exempt if it is no longer one’s homestead (a marital lien alone does not satisfy “occupancy” to obtain a Minnesota homestead exemption); child support and spousal maintenance counts as income for the purposes of qualification for Chapter 7 under the means test; an indemnification clause in the divorce decree may undermine the effect of a bankruptcy discharge; unless a full disclosure is made and the divorcing spouses are cooperative, the bankruptcy attorney may have conflict of interest issues that prevent joint representation of divorcing spouses.

Lynn Wartchow is a bankruptcy attorney located in Edina, Minnesota and representing clients in both Chapter 7 and Chapter 13 consumer bankruptcy proceedings throughout Minneapolis and St. Paul in Minnesota. 

Chapter 7 vs. Chapter 13 Bankruptcy: A Primer

Most often the people that come to me for help in bankruptcy do not initially know the difference between Chapter 7 and Chapter 13 bankruptcy, which Chapter may be better for them or even which form of bankruptcy protection they qualify for.

The similarities between these two Chapters are fairly straightforward: both are forms of consumer bankruptcy protection that can discharge debts such as credit cards, medical liabilities, home mortgage deficiencies, personal guarantees and even taxes. Both Chapter 7 and Chapter 13 require that a petition and schedules be filed with the U.S. Bankruptcy Court for the District of Minnesota, listing all assets, creditors and certain financial information for the last two years. Both require one mandatory appearance with a bankruptcy trustee at what’s called the “341 Meeting of Creditors”. Both Chapter 7 and Chapter 13 bankruptcy  are eligible for a discharge of some or all of the debtor’s debts.

The differences are distinct and some of the forms of protection afforded under each Chapter need to be understood. Chapter 7 is what’s called a “straightforward” or “liquidation” bankruptcy: once filed, your assets are reviewed to see if you have non-exempt assets which need to be turned over to the trustee, and within three months a discharge of the debts is ordered. Chapter 7 has income qualifications under the “means test”, in that you generally must be around or below the median income for the state of Minnesota in order to qualify. As of May 1, 2012, the median income in Minnesota for one person is $47,618 or $63,101 for a household of two, $74,050 for a family of three, $86,910 for a household of four, and so on. If your gross household income is above this threshold, you are generally steered toward Chapter 13 bankruptcy instead.

Chapter 13 is distinctly different than Chapter 13 in that it requires a monthly payment of three to five years to be made to the Chapter 13 trustee under a Chapter 13 plan. After the successful completion of all monthly payments made under the Chapter 13 plan, the debtor is then discharged of any remaining debt. Unlike most Chapter 7 cases where creditors usually receive zero money, Chapter 13 affords most creditors some fractional repayment of the total amount owed. Determining the monthly Chapter 13 payment is something that your bankruptcy attorney will need to help determine using Minnesota standard allowances and some actual expenses, such as mortgage and car payments, domestic support obligations and other monthly liabilities that are not necessarily discharged in bankruptcy.

Most recently, homeowners have been taking more advantage of Chapter 13 bankruptcy to strip a second or even third mortgage on their homes. This is relatively new law in Minnesota and as of the date of this post is still pending on appeal in the 8th Circuit. Nevertheless, most other states recognize second mortgage stripping and Minnesota is following that trend. Your bankruptcy lawyer can help determine when a mortgage may be strippable in Chapter 13 bankruptcy.

In order to understand what form of bankruptcy protection is right for you and what you want to achieve long-term, you should consult a bankruptcy attorney for assistance that is specific to your situation. Wartchow Law Office is an exclusive bankruptcy practice offering free consultations to analyze your circumstances and offer practical guidance on your options in both Chapter 7 and Chapter 13 bankruptcy and even on-bankruptcy alternatives.

Located in Edina, Minnesota, Lynn Wartchow represents clients in all Chapters of bankruptcy in Minneapolis, St. Paul, Ramsey and Hennepin County, and throughout
Minnesota.

When Will I Owe a “Deficiency” after Foreclosure in Minnesota? It Depends.

Under some circumstances after foreclosure, a deficiency may still be owed on a foreclosed property. A deficiency or “deficiency judgment” is obtained by some lenders (a.k.a. “mortgagees”) after a foreclosure on real estate where the sales price of the property does not cover the balance due on the mortgage plus related any fees and costs. The amount of the deficiency is usually the difference between the total amount due on the note including expenses and costs and the amount received from the foreclosure sale (or the fair market value of the mortgaged property if the property is agricultural).

Typically under the Minnesota Anti-Deficiency Statute (Minn. Stat. 582.30), a homeowner is protected from owing a deficiency on the first mortgage on foreclosed homestead real estate. This protection only applies to certain, although common, circumstances where the property is the owner’s home and the foreclosure process was conducted as a foreclosure by advertisement. If the property is not homestead, or otherwise if the owner moves out of the property or the property is foreclosed by action, Minnesota’s statutory protection against a deficiency may not apply.

Indications that no deficiency may be owed on a foreclosed home:

  • Property is classified as a homestead property
  • The home’s value is more than what was owed on the mortgage (i.e., the home had equity)
  • Foreclosure was conducted as a “foreclosure by advertisement”
  • Mortgage in question was the first mortgage
  • Home was not abandoned before the foreclosure process was complete
  • A discharge was received in prior bankruptcy and no refinance or reaffirmation of the mortgage has occurred since

Indications that a deficiency may be owed on a foreclosed home:

  • The property was non-homestead property, i.e. rental, agricultural or commercial property
  • The amount due on the mortgage exceeds the value or sales price of the property (i.e., no equity exists in the property)
  • Mortgage in question was the second or third mortgage (i.e., any mortgage other than first priority lien)
  • Foreclosure was conducted as a “foreclosure by action”
  • Instead of foreclosure, the property was short sold, surrendered or transferred back to the lender by a deed in lieu

A discharge in Chapter 7, Chapter 13 (or Chapter 11) bankruptcy relieves a debtor from owing a deficiency on a foreclosed mortgage in most instances. In order to understand your rights and the potential liability for deficiency that you may face, you should contact an attorney to review the real estate property and foreclosure process applicable to you.

Lynn Wartchow is the founding attorney of Wartchow Law Office located in Edina, MN and represents individual consumer and business bankruptcy clients in the Minneapolis / St. Paul and greater Twin Cities metro area in Chapter 7, Chapter 13 and Chapter 11 bankruptcy proceedings filed in the Bankruptcy Court for the District of Minnesota. Wartchow Law Office also represents consumer debtors in bankruptcy proceedings filed in the Western District of Wisconsin.

Received a Form 1099-C on Foreclosed Home? You May Qualify for the Mortgage Forgiveness Exclusion to Cancellation of Debt Income.

If you receive a Form 1099-C reporting ‘debt cancellation’ income after a home foreclosure, you may qualify for the Mortgage Forgiveness exclusion. As if the distress of home foreclosure isn’t enough, homeowners may receive a Form 1099-C from their former mortgage lender reporting the deficiency owed as income to the homeowner. The income reported on the Form 1099-C is what’s referred to as “Cancellation of Debt Income” or “Discharge of Indebtedness Income”, both of which generally must be reported as taxable income on an individual’s Form 1040 federal and state tax returns. When the 1099 relates to foreclosed real estate, the amount of cancelled debt can be significant and can consequently result in a substantial increase in tax liability for that year, loss of tax refunds or even additional tax liabilities owed to the IRS and Minnesota Department of Revenue.

For a more detailed discussion on tax debt and other tax resolution issues, be sure to read Wartchow Law’s Tax Blog.

Typically, cancellation of debt is an income realization event that must be reported on one’s tax returns. The idea is that any amount of principal or interest that a person legally owes but does not have to repay is considered taxable income in the year that such debt is cancelled. As an illustration, if you owe a commercial lender $15,000 between interest and principal due on a loan but that creditor agrees to accept $5,000 and cancel the other $10,000 in satisfaction of the full amount, that creditor is required by federal law to issue an IRS Form 1099-C, which reports the $10,000 cancelled debt as taxable income to you. Depending on the circumstances, the amount reported on Form 1099 must be included as personal income unless a statutory exclusion applies. Most of the IRS’s income exclusions are conditioned upon insolvency of the taxpayer—i.e., total debts exceed total fair market value of all assets—however bankruptcy is not necessarily required to qualify under certain IRS insolvency exclusions. Even in the absence of insolvency, a homeowner may still qualify for the Mortgage Forgiveness exclusion.

The Mortgage Forgiveness exclusion is provided under the Mortgage Debt Relief Act of 2007, which allows most taxpayers to exclude 1099 income resulting from the discharge of debt on their principal residence. The key to qualifying for this exclusion is that the debt must have been incurred to buy, build or substantially improve your principal residence and the debt must have been secured by your principal residence. Most traditional mortgages on homestead properties would meet this criteria. Currently, the Mortgage Debt Relief Act only applies through 2012, after which it may be extended by additional act of Congress.

When an individual files for bankruptcy, Section 108 of the Internal Revenue Code automatically excludes any debt that was discharged in the bankruptcy from taxable income. This is why consumer debtors who receive a discharge in a Chapter 7 or Chapter 13 bankruptcy proceeding rarely receive a 1099 regarding any of the discharged debts (and if you do, you should talk to your tax preparer about your options to dispute the 1099).

Wartchow Law Office is a law firm located in Edina, Minnesota with  an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law,  representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

For more information on The Mortgage Forgiveness Debt Relief Act and Debt Cancellation, see IRS Publication 4681 and IRS Form 982 available on the IRS website at www.irs.gov. You should always ask your tax professional for tax advice and not rely on information found online. This information is intended for entertainment purposes only and use of any information from this site or any other web site referred to is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.