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How Texas residents can deal with excess debt and taxes

It's common for people to be overwhelmed with debt. Under these circumstances, lenders may forgive or cancel excess debt owed. Due to the debt cancellation, many Texas residents are required to report this as taxable income. With the Mortgage Debt Relief Act, cancellation of debt on someone's residence may be excluded from taxable income.

When individuals are no longer obligated to pay their creditors, it's called debt cancellation. Once this occurs, creditors must report the amount forgiven to the IRS using the 1099-C form. Now that the debt is forgiven and reported, individuals must normally include this as income. However, there may be some exceptions to this rule if certain conditions are met. Debt that was reduced due to foreclosure or restructuring of a mortgage may be eligible for relief under the Mortgage Debt Relief Act.

For married couples, the amount of forgiven debt can be up to $2 million and for single individuals, $1 million. Debt cancellation through insolvency may result in a portion of the cancellation nontaxable to the individual. Also, another exception for reporting taxable income from debt cancellation is through bankruptcy.

Many people who have excess debt find it hard if not impossible to pay off their outstanding balances. In these situations, lenders may forgive the debt, resulting in the individual owing nothing. Although the Mortgage Debt Relief Act can benefit homeowners, it doesn't apply to other debts. Filing bankruptcy may be the most suitable solution for Texas consumers to discharge their debts and avoid being taxed on debt cancellation.

Source: Aiken Standard, ON THE MONEY: Cancellation of debt, Greg Roberts, Feb. 23, 2014

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