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Owe taxes on foreclosed property?

For the past decade, nationally syndicated talk-show host and best-selling author Dave Ramsey has helped hundreds of thousands of Americans get out of debt and start living with financial freedom. His genuineness and financial insight have made him something of a national phenomenon. Each week, in this space, he will answer questions from readers about personal finance.

Dear Dave,

My husband and I recently lost our house in a Chapter 7 bankruptcy, and we didn’t reaffirm it. It went thorough foreclosure, but today I got a tax form 1099A from the mortgage holder saying there are taxes due on the property. Can you tell me if we are liable for these taxes? What do I need to do to take care of this, or was this supposed to be covered in the Chapter 7?


Huntsville, Ala.

Dear Teresa,

Here is the deal: Debt that is forgiven is taxable and they are required to send out a 1099. A good example of this is that if you have a credit card on which you owe $5,000 and it has gone unpaid for a long time and the credit card company says that they will settle with you for $2,000, they have forgiven $3,000 worth of debt, and that amount is taxable and you will be sent a 1099 on that extra income, just as if you had earned an extra $3,000.

Now the exception to this rule is when you have filed a Chapter 7 bankruptcy. There is a loophole in the IRS law that requires that this type of debt forgiveness does not become taxable. I don’t think this notice you got will mean anything to you at all. It most likely is nothing to worry about. But I do want you to double-check this with your tax attorney. If you don’t have a tax attorney, this will be a good year for you to hire one. I believe, however that tax forgiveness under a Chapter 7 is one case that is not taxable.

Now that you are on the other side of this bankruptcy, I hope you have drawn a line in the sand and have decided to never borrow money again. Get control of your situation and work to move ahead from here.


Emergency fund or pay off debt?

Dear Dave,

My husband is 28-years old and has Multiple Sclerosis. Right now he is still in OK physical condition, but there is a possibility that one day he will become disabled. My life insurance agent told me that he would have to go for 12 months without going into the hospital for the rates to be anywhere near affordable for us, if we could get it at all. I know you recommend term insurance for healthy individuals, but would that be the same for someone in our situation as well?


Kalamazoo, Mich.

Dear Darlene,

Term insurance is the only type of insurance I recommend, and that goes for your case as well. In your situation, a 20-year level term-insurance policy is exactly what you need. The other thing you need to do is to start saving like crazy people. You also need to invest like crazy people, too. You need to be prepared for the inevitable future here. It is a future we all face, it has just been thrown in your face a little sooner with the MS. We will all face getting older, becoming debilitated to some extent at some point and dying at some point. We will all do that. That is what life insurance is for and that is what savings is for as well.

I would never send you to whole-life life insurance. It is a bad deal. The average rate of return on a whole life policy is about two percent. When you die they keep the money and pay only the face amount. It is a horrible product. However, if you can get some decent term insurance with MS, that is what I would do, and start saving every penny you can get your hands on right now. Build up a nest egg as fast as possible, and you have an extra incentive to do it quicker than most people.

God bless you, Darlene



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