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You do not owe taxes on debts discharged in bankruptcy


Richard M. Alderman Interim Dean of the Law Center

Q. I filed bankruptcy. I have now received a 1099 form from one of my creditors. Am I responsible for taxes on the money that was discharged?
A. When a debt is discharged, cancelled or written off, this may constitute “income” to you. That is why you received the form 1099-C. Creditors are required to send a 1099-C under certain circumstances, but it does not mean you have to pay a tax on the discharged amount. Not all cancelled debt must be included as income. The IRS Code provides that if the debt is discharged in Bankruptcy, or you are insolvent at the time the debt is written off or discharged, you do not have to pay taxes. I suggest you visit the IRS website, www.irs.gov, and look for information about “cancellation of debt,” topic 431.You also might want to speak with a CPA or tax preparer to make sure you properly file your taxes.
Q. I received a letter from a debt collector telling me that if I didn’t make arrangements to pay he would take all the money in my bank account. The only money in that account is my Social Security check, which is all I have to live on. What can I do to protect myself?
A. It is not necessary for you to do anything to protect yourself; Congress already has protected you. First, no creditor can take any money from your bank account without first suing you and getting a judgment against you. More importantly, under federal law, your social security check is protected from your creditors even if they sue and win. A creditor cannot take Social Security funds when they are in the bank. I suggest you let the debt collector know that you know your legal rights and you expect he will stop making unlawful threats. Be sure to inform him that the only money in that account comes from your Social Security check. If the debt collector continues to threaten to take the money in your bank account, he probably is violating both federal and state debt collection laws. My guess is he will stop threatening once he knows you know your rights.
Q. I don’t own very much besides my house and car. I am thinking about writing my own will. Is a handwritten will valid? Does it have to be witnessed or notarized?
A. A handwritten will, called a “holographic will,” is valid in Texas. Basically, all that is required is that the will be written completely in your own handwriting. A holographic will cannot be typed or printed. Unlike other forms of wills, a holographic will does not need to be witnessed to be valid. There is no requirement in Texas that any form of will be notarized. Most wills are notarized, however, because this makes it easier to probate the will.
Although a holographic may seem simple and is legal, in my opinion it generally is not a good idea. One mistake can end up costing your loved ones a great deal in time and money. Many attorneys will prepare a simple will for a very reasonable fee. Also, some online companies, such as LegalZoom, provide very inexpensive wills with clear directions. As far as I am concerned, having an attorney assist you with your will or using an online provider is money well spent.
Q. I bought a house with my former girlfriend. She is now living there. How do I get my name off the mortgage?
A. Unfortunately, questions about major purchases between partners are not uncommon; and most do not like the answer. The only way to get your name off the mortgage or other major debts is for the other person to refinance in his or her own name, or, get the lender to agree to release you. As a practical matter, refinancing is your only option. Buying things such as a car or house during a relationship often sounds like the right thing to do. Terminating the legal obligations that arise is not as easy, however, as ending the relationship.

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