Losing your home to foreclosure is a heavy blow. Then a tax audit notice arrives in the mail. The IRS claims you owe more tax. Foreclosure, or even selling your home for less than you owe can have unpleasant tax consequences. A recent New York Times Business section article describes a couple in Allentown, Pennsylvania, who received a bill for $36,603 from the IRS for taxes due after their home was foreclosed. By far the easiest way to avoid this situation is to file for bankruptcy before a foreclosure sale occurs. Debts discharged in bankruptcy are not considered income for IRS purposes.

If you believe that the sale price of your home in foreclosure will fall substantially short of the loan debt, tax advantages of bankruptcy may outweigh the costs of filing, damage to credit rating, and other disadvantages of bankruptcy.