A repossession is devastating to your finances. It wreaks havoc on your credit score, tarnishes your reputation and may possibly bring the Internal Revenue Service (IRS) officials to your door. Repossessions all too often lead to a delinquent tax bill, because the federal government considers the forgiven amount due on a loan as a gain one that must be reported as income. Such a position is avoidable however, by following these instructions.
Watch out for a 1099 Creditor Chargeback Tax form stating the amount of the forgiven debt. Retain this form. It is mandatory that you file it in with your income tax forms for that tax year.
Stay in contact with your lender. If they choose to forgive the debt, then you may have a tax liability. If you must repay the loan, then there is no tax liability.
File for an extension if you cannot pay the entire tax bill. This will give you more time to come up with the required funds.
Retain any records that pertain to the auto loan and the repossession. In some cases, a lender may issue a 1099 long after the debt is expunged. If that is the case, you can use your records to argue and they may not be able to hold you liable for the debt.
Speak to your lender immediately after the repossession so that you can prepare for the debt. The lender can tell you if they will forgive the debt and how much that amount will be. Depending on your income, you determine how much your liability will be.
