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An inside look at the IRS Rules regarding Debt Elimination

In this age of economic meltdown and post recession hangover, the number of consumers filing bankruptcy is increasing day by day. In fact, these days, the incidents of debt elimination and debt forgiveness are quite common. However, IRS claims most of this forgiven debt as taxable income and the consumers have to pay off the debt amount some way or the other. Nevertheless, the good news is when the financial catastrophe took place in the 2000; IRS took a softer line on certain debt issues. For all other debts, tax exclusions generally depend on the consumer’s particular financial situation.

Mortgage Debt Relief Act

In 2007, Mortgage Debt Relief Act came into effect, which is valid till 2012. According to this 2007 tax legislation, taxpayers can exclude up to $2 million of mortgage debt forgiveness on their principal residence, if they are single and if they are married the amount forgiven is 1 million per individual. This is only applicable under certain situations. For example when your home value declines, when you are unable to pay your mortgage any more, when you fail to reduce your debt loads even after a mortgage refinance and finally when your properties is seized by the lenders due to foreclosure. Only under the above mentioned situations you will be able to relieve the debt without counting it as income. Report your debt cancellation on the IRS’s 982 form, called Discharge of Indebtedness during tax season.

 

Bankruptcy

If your debts are discharged under bankruptcy, you won’t have to worry about the canceled debt being taxable income. In fact, if the debt was released during a Chapter 11 bankruptcy case for a corporation, the IRS will still regard it as non-income. In addition, when a lender cancels your debt because it holds equal value of your assets, IRS will allow canceled debts to be tax-free.

Student Debts

In fact, your canceled student loan could be eligible for exemption from taxation, provided you made an agreement with the creditors that you will work in a certain job for a stipulated time period of time or the IRS considers that you have other significant obligations in place of paying the loan. Moreover, exclusion of student loan from taxable income could be possible, if the loan was offered by a government organization or a tax-exempt corporation or a school that offers placement service for students.

 Farm Debts

If your debt is all from farming expenses, you are entitled to some IRS breaks when it comes to debt cancellations. In fact the canceled debt won’t be counted as taxable income at all, if half of your income from the last three years was due to farming.

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A new 3 week CAP Money Course starts on Tuesday 2nd June 2009 and is held again on Tuesday 9th and 16th June. Since the course is run at the Barkentine Health Centre, Westferry Road, London, E14 (Isle of Dogs) it is probably more accessible to those living in or around the East London area.

The course is FREE (always a great price, FREE!) and will teach you the simple way to manage your money effectively.  The CAP Money Course will either help you get out of debt or stop you sinking further into debt.

The course is run by a Christian organisation (Christians Against Poverty). The advisers on the course are people in the church that have undertaken a course that enables them to coach you through the learning process. There’s no hard work to do, it’s all good humoured and fun and the people that put the event on are very friendly and understanding. They even supply tea, biscuits and, occasionally, home-made cakes! Very nice )

Places are limited and on a first come, first served basis so if you are interested I urge you to ring Joan Turner at the Quaystone Church Office on 020 7093 3146 and reserve your place now.

Remember that only knowledge with ACTION is power. Take the first bold steps to sorting out and managing your money. I did and I paid off my mortgage! (I’m writing a book about how I did that so stay tuned to this blog).

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What’s the difference between a Visa debit and Visa credit card?

It can be confusing but if you don’t fully understand the difference then it can end up costing you a lot of money!

The Visa debit card (or Maestro card or many other variations) is a card that allows you to pay for goods and services but the money comes directly from your bank account, thus you can only draw as much as you have in your account or up to the overdraft limit that you have. Usually, unless you are already overdrawn or it takes your account overdrawn, you won’t pay interest on the amount paid.

However, a Visa credit card is a line of credit granted by the credit card provider up to previously agreed limits. Each month you pay back either the minimum, a fixed amount or the whole balance. If you pay back the minimum or a fixed amount, leaving a balance on the account, you will PAY interest on the balance… and this can be a lot of money!

Know the difference between the two types of cards and keep a close eye on your spending. That way you won’t slip into any difficulty with money.

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Should I invest in a cash ISA? With interest rates so low and, worse still, savings rates so low, I have to question the wisdom and advice that some financial advisors are giving their clients right now and telling them to go ahead and invest in a low paying cash ISA.

All things being equal, it seems a nonsense to me. If you have money in the bank saved up for day to day emergencies, a long term savings plan in place for those larger items you want and around 3 to 6 months money stashed away for redundancy protection until you get another job, then I believe you should use all your spare savings to pay back unsecured (or secured) debts.

Let’s look at some figures to make it easy for you. You have £3,600 now and you’re not sure what to do. ISA rates are around 1% (say) but the debt on your credit card (ignoring introductory rates and special deals and assuming you are only paying the minimum) is around the 19.9% mark. “DO THE MATH! ” (as the Americans would say). To be able to earn enough to offset your credit card payments you would need to earn a credit rate of 24.875% (assuming you’re a basic rate – 20% – tax payer). Compare 24.875% against 1%.

Conclusion: PAY OFF SOME DEBT and start turning the tide of compound interest back in your favour.

UK Interest Rates Sink to Lowest Level in UK History

12 noon on 5th February 2009 saw UK interest rates sink to their lowest level in UK history. Anybody with a standard variable rate mortgage should be in line to collect a windfall of cash as their mortgage repayments go down next month. The Bank of England Base Rate has dropped from 5% to 1% since October 2008, leaving struggling homeowners and buy to let landlords quids in.

Prior to October 2008 people on a fixed rate were dreading the usual hassle of re-mortgaging. House values were dropping fast and credit was hard to come by as lenders were protecting their rapidly falling balance sheets and reducing their exposure to the falling UK housing market. The sweet interest rates on offer were often laced with poisonous administration fees and other fees which, when taken into account in the amount of mortgage repaid every month, often meant the borrower was the same or more often, worse off. The headline rate was a real teaser!

In times like this it’s time to take heed of that old adage – “make hay while the sun shines”. Because although it might not feel like the sun is shining right now in the general global economy worldwide, it is YOUR economy that counts and now is the time to try and turn the tide.

With the savings made from reduced mortgage repayments it would be advisable to take one or all of the following actions:

1. build up a savings buffer of approximately one to six months monthly expenses, including monthly debt commitments. If your debts are high I would suggest saving up a two month buffer and then begin to tackle the high interest rate debts
2. pay extra off of the credit cards. Never be satisfied in paying the minimum amount. If possible cut a few up and cancel the accounts with the credit card provider. This will actually help your credit score, particularly if you’ve been hammering it in the run up to Christmas.
3. check with your mortgage provider first, but oftentimes you can make capital repayments off of the mortgage balance. It might be a minimum of £1,000 or a multiple of your monthly payment. Either way, check with your lender to ensure you can make lump sum payments of capital without incurring any charges.
4. pay off any money you might owe friends and family. They are often the last to be paid because they are the most patient, yet treat them badly by making them wait too long time for their money and you will quickly alienate them, possibly closing off a much needed avenue of help in the future should it be necessary.

If you have any other magicmoneytips please post them using the comment box below.

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