Will 1099C received after short sale prior to bankruptcy will be included as income in Chapter 7 means test calculations?

Asked over 2 years ago - New York, NY

About to short sale on investment property. Currently unemployed and qualify for Chapter 7. If the bank issues 1099 after short sale, will I have to include that as income for the purposes of means test? According to accountant I will not have to pay taxes by using IRS form 982, insolvency exclusion. thanks

Attorney answers (4)

  1. Kathryn Ursula Tokarska

    Contributor Level 16

    4

    Lawyers agree

    Answered . The Means Test includes income ONLY ACTUALLY RECEIVED. The 1099 income for short sale is sometimes also called phantom income because it's not actually received.

  2. Walter C Oney Jr

    Contributor Level 17

    3

    Lawyers agree

    Answered . No. The definition of current monthly income in section 101(10A) is a bit murky, but a court would hold that this kind of imputed income is not counted in the means test because it does not result in your having greater ability to pay your creditors.

  3. Michael A. Koplen

    Pro

    Contributor Level 11

    1

    Lawyer agrees

    Answered . I usually advise my clients that in lieu of a short sale, simply file Chapter 7 and surrender the property to the lender in the bankruptcy. This approach is simpler, less expensive and obviates any possible tax consequences to you. You won't need to put any money in the property as you sometimes do prior to a short sale. Brokers will often push for the short sale because they earn a commission, but you can accomplish a surrender of the property simply by surrendering it in the bankruptcy, a superior approach in my opinion.

  4. Michael Hal Schwartz

    Pro

    Contributor Level 15

    1

    Lawyer agrees

    Answered . I really doubt that a 1099c for a short sale before filing bankruptcy will constitute as income under the means test. However, if you are filing bankruptcy why take the tax hit on the forgiveness of debt by doing a short sale. File bankruptcy first and if you want to, do the short sale second.

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