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Questions about Insolvency Rules

What are insolvency rules?

In order to determine insolvency you can create a financial statement with a table of assets compared with your liabilities. Value of asset constitutes assets serving as collateral and exempt assets, assets which cannot be acquired by creditors as per law. For example: interest on pension and value of retirement account. In the event, the total of your liability in dollars exceeds the fair market value (FMV) of your assets after you had a settlement or debt cancellation, you are officially considered insolvent by the Internal Revenue Service (IRS). In the case where you are considered insolvent, you are not required to declare the amount on Form 1099-C as income. It is advisable to file for insolvency with the IRS as the creditors would have sent copies of your 1099-C to the IRS. Insolvency can be filed along with tax return using form 982 – “Reduction of Tax Attributes due to Discharge of Indebtedness”. A letter can be sent to the IRS detailing your insolvency along with financial statements as proof. The IRS pardons cancelled debt as income only to the extent of insolvency. If an insolvency announcement is made, stockholders will need to decide whether they wish to liquidate their shares or hold back until the company recovers.

How does insolvency differ from bankruptcy?

In common terminology these terms are used interchangeably. Insolvency is a term used to describe a situation where you cannot repay your debts but there is no legal status attached to it. Insolvency alone cannot be used as affirmative defense to a debt. The IRS may grant you some leeway because of this but they do not offer any protection against creditors. Whereas when you are bankrupt, you file for it in court allowing you to restructure your debt.

I have lost all my properties and the related documents. I am filing for insolvency. How often do the IRS audit insolvency?

There is no fixed number of times a person can be audited for insolvency by the IRS. However if you are audited it would be your responsibility to prove your insolvency. Though you have misplaced the related documents it is fairly simple to obtain what you need. First you can request for bank statements and investment account statements for the month in which the property was foreclosed. A real estate broker can provide a price estimate of each property at the date of foreclosure. You can determine the debt cancellation from the Form 1099-C. Next step would be to add the account balances from the statements, add the price estimate of the property and subtract the amount from 1099-C. If the resultant amount is zero or less you are considered insolvent.

I am going through personal insolvency. What answer do I give to credit card companies?

You can inform the credit card companies in the form of a letter of your inability to pay your debts as they are due and that you are judgment proof. This implies your creditors would need to agree upon some compromise with regard to your debts. This could be marking down of the interest charges and a reduction of the principal amount due. Despite this if you are unable to pay any amount it would leave you no choice but to file for bankruptcy protection leading to expulsion of all your debts.

Is there a way a tenant can be protected from a landlord’s insolvency?

One of the options a potential tenant can adopt to protect himself/herself from the insolvency of the landlord would be to have certain clauses in the agreement such as personal liability of the landlord in case of breach or liquidation damages and moving expenses being borne by the landlord if the lease were cancelled. This would help you survive an insolvency event of the landlord. Another option is if the landlord would end up insolvent, the tenant could file for bankruptcy protection making it more difficult for the trustee to cancel or annul the contract. Some tenants keep a check on the financial health and survival of the landlord through other businesses. You could also engage the services of a lawyer to negotiate and mediate between you and the trustee to ensure the lease on the premises remains intact.

When you are in a state of imminent insolvency, you may be undergoing tension and stress on how you will need to manage your financial situation. To add to this stress you may have several unresolved questions and doubts about insolvency, whether you need to file for bankruptcy, what are your options, rights and remedies. In order to get clarity and information to your questions consulting Experts will prove to be very useful as well as necessary.
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