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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
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Experience:  Over 20 Years experience
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Hello,I have an international consumer law/ tax question.

Resolved Question:

Hello,
I have an international consumer law/ tax question. I live in Europe and am employed by a company in the Netherlands. If there is a deficiency judgement put against me for the deficit from a short sale or foreclosure of a primary residence in the United States, does a US bank have the authority to garnish my wages from this foreign employer? Related to this point, is the tax implication. At some point, there will likely be a fairly large sum of money the bank will write off as a loss, and I understand I will then have to report this as earnings stated on a 1099 form. Other than the homeowner's debt forgiveness act, is bankruptcy the only mechanism to absolve this tax liability? Thanks.
Submitted: 11 months ago.
Category: Tax
Expert:  R. Klein, EA replied 11 months ago.
Hello, and thank you for your question.

Regarding collections of a debt from the US, the debt is owed to a private company, and not to the government. As such, the remedy to collect an unpaid debt from an employer is based on the law of the location of the employer. For example, if you lived in Texas, it is not possible to garnish a wage of a Texas employee except for government-type debts, such as child support or federal tax debts. However, if you lived in Indiana, the same debt could be collected from a wage garnishment in that state.

The ability to garnish wages in the Netherlands is based upon similar concept. First, is it LEGAL to garnish the wages of a worker in the Netherlands for a private debt? (I don't know the answer to that one), and second, is it FEASIBLE for the debt collector to go enforce the collection out of the US. For that answer, I would say it is highly unlikely that a company would go through that effort unless the collectible debt is in the millions of dollars.

Regardless of the legal ability or the feasibility to garnish your wages in the Netherlands, it is mostly a moot point--in other words, nothing to worry about. This is because once the bank has "written off: the debt as uncollectible and sent out a 1099-C, it is effectively stating "we cannot collect this debt and we are writing it off as uncollectible". In order to do this, the company gives up its right to collect the debt ever again.

As for the second part of your question, once a 1099-C is issued, is it income? The answer is, YES, it is income. But the second part is "is it TAXABLE income?" The answer to that is less clear.

Under US Tax law, the forgiven debt is not taxable if one of the two conditions are met: 1) If the foreclosed property was your MAIN RESIDENCE and you were foreclosed because the value of the property dropped below what you owed on it and you could not sell the property for what you owed, and/or 2) the income is not taxable to the extent that the canceled debt exceeds your net worth. In other words, you were financially insolvent.

Regardless of the case, you must file a tax return to show the income and then if one of the exception applies, you must tell the IRS which applies and to how much of the debt is NOT taxable.

So, at the end of the day, NO, the bank will not come to the Netherlands to collect the debt, and you will need to file a US Tax return if a 1099-C was sent to you, but you MIGHT NOT have to pay tax.
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 2882
Experience: Over 20 Years experience
R. Klein, EA and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Hello R. Klein.


Thank you for your response. I would like you to clarify one point before I accept the answer.


 


Pertaining to the tax consequences, is what you described regarding the two conditions only tied to the infamous "home owners debt foregiveness act" or are these two conditions in place regardless? Is it critical to get this debt off the books this calendar year or while the act is still in place? What are the implications after the act goes away at the end of this calendar year.


 


I can say that the foreclosed property is 1) my PRIMARY residence and foreclosure will occur because the value is much lower than what is owed. However, for 2) what is considered net worth - liquid assets/monies and/or retirement accounts (401K, RothIRAs, etc.) or bothe?


 


Thank you.

Expert:  R. Klein, EA replied 11 months ago.
the first instance of the income being not taxable refers to the The Homeowner debt Forgiveness Act which is still in effect in 2013.

The insolvency exception has always been true.

The measuring stick for the value of your home being underwater is the value of the home on the date of foreclosure versus the mortgage balance.

If you bought a house for $100K and took out a $95K loan, but th house zoomed up in value to $200K, then dropped back to $110K, then you were never underwater.

If you took out a $95K loan on a $100K value property and at the foreclosure time the property is worth $80K and you still owe $90K, then you are underwater.


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