Over the past few years, the number of people who have had student loan debt forgiven because of a “total and permanent disability” has increased dramatically.
Reasons for this could be that in recent years college tuition has soared while at the same time the Department of Education has made it easier for borrowers who became disabled to qualify for a disability discharge.
In fact, the Department of Education reported that the number of disabled Americans qualifying to have their student loans discharged increased from fewer than 15,000 in 2008 to around 115,700 in 2013.
Since student loans typically aren’t forgivable in bankruptcy proceedings, the disability discharge has become crucial for people who have found themselves unable to work because of a debilitating illness or condition.
However, many of these individuals are then shocked to find out that after forgiving the student loan debt, the government is then turning around and handing them a hefty tax bill.
That’s because in effort to close a potential tax loophole, the IRS treats most canceled debts as income. That means if a disabled individual has $100,000 in student loans forgiven, he or she could end up owing the IRS tens of thousands of dollars in taxes.
Not paying the IRS bill can have extremely serious consequences such as the garnishment of wages, retirement accounts and savings accounts. Liens can also be applied to real property such as a person’s home.
Currently, insolvency is one of the only ways to have the IRS debt wiped out for those who cannot afford to pay. However, proving insolvency to the IRS is no easy feat. It may also be possible to reach a repayment agreement or get the bill reduced by working with the IRS, but this is also a difficult task.
Ultimately, people who find themselves with hefty bills from the IRS after a disability discharge need to work with an experienced attorney right away who can help them through this unfortunate situation that many Americans are currently dealing with.
Source: New York Times, “Disabled Borrowers Trade Loan Debt for a Tax Bill From the I.R.S.,” Tara Siegel Bernard, March 27, 2014