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Posted Dec 9th, 2011
Do I need to file the bankruptcy petition before repossessed vehicle is sold at auction in order to
avoid reporting and paying unearned income tax?

Additional Details:
Have met qualifications and am preparing to file Chapter 7. My car which still had 2 of 5 years to
complete the finance contract was repossessed. With regards to real estate property which is not
being listed as exempt, it is my understanding that if the petition is filed before the foreclosure
sale the deficiency is just included as part of the relief sought. However, if the bankruptcy
petition is filed after the real estate sale, the creditor has the right to issue a 1099 for the
deficiency which must be claimed on my tax return as unearned income. My actual question is, if
the above is accurate, then does the same timing apply to my vehicle which was just repossessed? In
other words, do I need to file the bankruptcy petition before repossessed vehicle is sold at auction
in order to avoid reporting and paying unearned income tax on the deficiency of the vehicle?
Legal Topic Area: Bankruptcy in NJ

You have this all mixed up. First, the debt forgiveness you are worried about occurs because your personal obligation to repay has been waived. Second, the income is not realized to the extent you are insolvent when it is forgiven, or you file for bankruptcy, which results in the debt forgiveness. The issuance of the 1099 is just that, it is not itself realization of income. If there is income associated, so be it. But your return will give your characterization. Now as to your question. If the vehicle is sold, and there is a deficiency, you still owe the debt, i.e., the deficiency. It is your personal obligation until you file for bankruptcy and are discharged from paying it. Think of it like this. I owe you $10. I can't pay. You grab $5 from me, and do it legally. I still owe you $5. I file for bankruptcy, the remaining $5 debt can no longer be demanded of me. So, I just had income of $5. But it is not taxable.


Answered on Jan 30th, 2012 at 3:45pm