Until 2018, homeowners in Tennessee could cancel up to $2 million in mortgage debt without incurring a tax bill. This was true for those who lost a primary residence through a short sale or foreclosure. However, this perk expired at the end of 2017 and is unlikely to be renewed because of the political climate in Washington. Therefore, those who have a home loan balance forgiven or canceled may need to claim it as income on a tax return.
Filing for bankruptcy can make it possible to have that debt forgiven without triggering a taxable event. However, those who are considering filing for bankruptcy to avoid a tax bill may want to consider the possible consequences of doing so. For instance, individuals can lose any assets that are not exempt under state or federal bankruptcy laws.
It is also a good idea to file before any tax liability is assessed. This is because the rules for eliminating tax debts can change after they have been assessed. Individuals who have credit card or other existing debts could find that filing for bankruptcy makes it easier to obtain a fresh financial start. According to the National Association of Realtors (NAR), there were 360,000 homes in foreclosure in 2018.
Individuals who are seeking debt relief may find it by filing for Chapter 7 bankruptcy. A liquidation bankruptcy may allow a debtor to eliminate some or all debts without the need to make any payments to creditors. In some cases, debtors will be able to keep some or all of their property after filing. Other possible benefits of bankruptcy include getting an automatic stay of creditor contact and the ability to have debts eliminated in a matter of weeks or months. An attorney could explain the bankruptcy process to an interested party.