Are you using a debt management firm to settle your debts? Have you recently completed a short sale? Have you had a property foreclosed and the bank received less than the outstanding balance on the mortgage? If you have answered Yes to any of these questions, you should be on the look out for a 1099C from your creditors.

A 1099C forgiveness of debt is a statement that is issued to the IRS by a creditor in instances in which that creditor has not received payment in full of a debt. In essence, the foregiveness of debt can become ordinary income that you must declare in the year the debt was written off.

A creditor is required by law to issue a 1009C to any individual who settles a debt or has a debt written off that is in excess of $600.00. This is a very big trap that people with a large amount of debt may find themselves in. If you have received a 1099C in the mail, you may have to declare the amount stated on that form as ordinary income, and you will have to pay tax on it.

The 1099C is required to be issued by any creditor that settles a debt, or writes the debt off and the amount is over $600.00 For example, lets say that you settle a $25,000.00 credit card debt for $10,000.00. You will eventually receive a 1099C for $15,000.00 from your creditor. You will be required to declare that amount as income on your tax return and you may end up paying tax on it. This could, depending on your tax bracket, add up to an additional $5,000.00 to the cost of your so-called settlement.

There are two exceptions to the 1099C rule for most debt. The first applies when you are insolvent as the time the debt is written off. This is defined by the IRS. The second is if you file bankruptcy before the debt is written off and the 1099C is issued. In either of these events, there is no income to declare. Please note that if you file bankruptcy after the 1099C is issued, you may still have to declare that as income.

There is a third exception that has a limited impact on certain real estate trasnactions. It is the Mortgage Forgiveness Act of 2007. It applies to the homeowners of residential real estate only. It also only applies to only to homeowners who had the debt written off during 2007 to 2012. The IRS website has examples to help you determine if you can qualify for this exception.

The issuance of Form 1099C and its consequences are often overlooked before making the decision to file bankruptcy. Its impact must be considered and may become the primary reason to choose the filing of a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

If you are considering filing for bankruptcy, this is not time to go it alone. Much of what goes into the filing of a bankruptcy petition comes from the insightful and probing questioning from a qualified bankruptcy attorney. Under New York State law, only a licensed attorney can provide legal advice. Paralegals and other bankruptcy petition preparers are strictly prohibited from practicing law, and therefore, can not give you legal advice or ask the necessary questions to make sure that you completing your paperwork fully and completely.

There is nothing in the law that prohibits an individual from filing a bankruptcy petition without the assistance of counsel. However, if you choose to file a bankruptcy petition without the assistance of an attorney, the Bankruptcy Court Trustee and the Bankruptcy Court Judge will presume that you have the knowledge and experience of an experienced bankruptcy attorney. When you file bankruptcy papers with the Court, you file these documents under the penalty of perjury. If you list information incorrectly in your petition, or omit necessary items, it is your problem and your problem alone.

When you file a bankruptcy petition, it is extremely important to be comfortable and have confidence in your representative. You will be revealing all your financial records. Do not be afraid to ask questions about fees, in particular, whether payment terms are available. Some paralegal services charge a minimal fee to prepare and file the necessary paperwork to file a bankruptcy petition. It has been my experience that the risk is simply not worth the small savings.

Last, don’t be penny wise and pound foolish. Many attorneys are willing to take your case for a similar fee than which may be offered by a non-attorney. You must choose intelligently. Retaining the services of a professional to protect your property is serious business. You should be confident with your final choice.

This is a question commonly asked by many of my clients. Miami based immigration lawyer Michael Shane answers this question in a concise and well written article entitled “Effect of Bankruptcy on Naturalization Eligibility,” which is published on the Lawyers.com web site.

Mr. Shane notes specifically that there is no immigration law, statute, or regulation that specifically forbids individuals who have filed for bankruptcy from applying for Naturalization. Additionally, there is no specific question on Form N-400, Application for Naturalization, inquiring into bankruptcy. He also notes however, that your immigration status can be affected if you have not filed required tax returns or if you owe money to the IRS.

The INS is basically looking to see if an individual seeking naturalization has evidence of “poor moral character” which could be grounds to deny an application. The filing of a bankruptcy petition as a consequence of financial hardship clearly does not rise to the level of “poor moral character.”

Mr. Shane suggests, and I agree, that if you are facing any type of immigration issue, you should disclose that fact to your bankruptcy lawyer at your initial consultation as well as discuss your potential bankruptcy filing with your immigration counsel.

Are you approaching retirement? Are you still burdened with massive minimum monthly payment obligations on your credit cards? Are you concerned that you will not be able to continue to maintain these payments once you stop working?

U.S. News and World Report noted in a recent posting that an increasing number of Americans are entering their retirement years with debt. Some 63 percent of U.S. families headed by someone 55 or older still owed money on their home, credit cards, or other debts in 2007, up nearly 10 percentage points from 1992

Over the past 20 years, I have encountered countless individuals in mid-life who have agonized over the prospect of filing bankruptcy. I call it the “moral dilemma”. We have been ingrained with the concept that you work hard and pay your bills on time. I have also observed that, at some point, most of my clients reach a personal “breaking point” in which they come to realize that they have to consider filing for bankruptcy.

If you have answered “Yes” to any of the questions above, I suggest that you consider a different approach. Although it is never too late to actually file for bankruptcy, you could end up in a more advantageous financial position in retirement if you consider bankruptcy in the last 5 to 10 years before you retire – particularly if you have never owned a home and have limited retirement savings.

Many people exhaust everything they have – including retirement funds – to avoid filing for bankruptcy, but yet end up in a situation where it still becomes necessary to file bankruptcy.

In New York, where I practice, all ERISA qualified retirement accounts (IRA, KEOUGH, 401k, 457, etc.) are fully protected from the claims of creditors, even in bankruptcy. Technically, it is considered exempt property, or an exemption.

The worst thing that you could do is to tap your retirement savings to pay credit card debt. If you are considering bankruptcy, do not look to your retirement savings to bail you out. I ask you to look only at your present cash flow. If you cannot meet your obligations based upon your present cash flow, I suggest that you seek the counsel of a qualified bankruptcy attorney.

If you act before you spend down your retirement savings, you may still be able to eliminate your credit card and other debts and still retain your nest egg as you approach retirement.

Unfortunately, if you have already tapped some or all of your retirement savings, attorneys cannot go back and get the money that was already paid out. What we can do is to assist you to protect your remaining and future retirement savings. Filing for bankruptcy will help to stop the harassing phone calls and letters, and leave you debt free so that you can move forward as you approach retirement. While it is never too late to file, the smart move is to seek counsel when the first sign of trouble is apparent – not after you have exhausted your retirement savings.

Brittni T. Feldenkreis, Esq. contributed to this posting