The concept of discharge can prove to be a bit confounding to individuals not directly involved in the field of bankruptcy, especially when it comes to how that debt is taxed or not taxed.
Essentially, discharge means the debt is forgiven or canceled, and the creditor has either agreed to the debt being wiped out or the creditor is prohibited from pursuing future payment. Bankruptcy can only cancel debts that exist at the time the petition is filed.
IRS Forms You May Receive
Even after a bankruptcy has successfully been completed and closed, you may receive a Form 1099C from the IRS showing the amount of debt that was discharged. Although we are not tax professionals, we advise you to fill out the 982 Reduction of Tax Attributes Due to Discharge of Indebtedness to your income tax return—which shows the IRS why the discharged debt is excluded from taxable income.
On the flip side, if you settled or negotiated debts before you filed bankruptcy (or instead of bankruptcy), it will likely be a different story. You will have to fill out a Form 1099C on your tax return if the lender agreed to forgive the debt. This is money you have borrowed and did not pay back, making it income in this situation. Once a lender has forgiven debt and it is reported on your taxes by a 1099C, even if you chose to file bankruptcy later, that debt is gone and has been turned into income, and the bankruptcy will not discharge something categorized as income.
Determining If Your Forgiven Debt Will Be Taxable Income
If you have experienced debt settlement before filing a bankruptcy, we strongly advise you to consult a tax professional to determine if your forgiven debt constitutes as taxable income. We will certainly admit to being bankruptcy experts and do our best to assist you successfully while filing your bankruptcy, but we will always recommend seeking tax advice from a tax professional.
CALL NOW FOR A FREE STRATEGY SESSION FROM A MN BANKRUPTCY LAWYER AT KAIN & SCOTT
We will assist you in a chapter 7 or chapter 13 bankruptcy to discharge your debt and certainly answer any questions to the best of our ability. If you are thinking about debt settlement, stop and visit www.kainscott.com and schedule a free consultation to discuss your options before you make a decision that might harm more than hurt.