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Tax debt becomes financial burden for disabled borrowers

When someone is diagnosed with a serious illness or suffers from a major injury, a lot of questions arise all at once. One big issue quickly becomes finances, which can suffer when someone is hurt and cannot work. In some cases the inability to work because of an illness can lead to the loss of one’s job and often their benefits, which can result in the accrual of medical and other types of debt.

Under current tax law when individuals who seek a debt discharge because they are disabled and cannot work must claim that discharged debt as income on their federal income tax return. Those with a disability have few options when it comes to paying their tax bill, since their inability to work was the thing that gave rise to their unpaid debt in the first place. Adding insult to injury, tax debt is almost never discharged during a bankruptcy proceeding, so those faced with large tax bills have few choices but to try to find a way to pay it back over time.

One exception to the rule is to seek a lesser tax liability if one can prove insolvency, but it does not eliminate the tax bill and many people are not aware that they can seek help under this exception.

In addition to the tax issues, some borrowers with forgiven debt might find that adding the amount to their adjusted gross income for the year leads to a loss of public benefits like disability insurance benefits.

Source: New York Times, “Disabled Borrowers Trade Loan Debt for a Tax Bill From the I.R.S.,” Tara Siegel Bernard, March 27, 2014. 

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