What Tax Ramifications Are There When Filing Bankruptcy in MN?

Posted by Serena Seashore on March 8, 2021 at 7:23 AM
Serena Seashore

A grey table surface covered by a blue paper with bar graphs, a yellow and a purple binder clip, a yellow paperclip, the corner of a purple folder, a white pen, and two black post-it notes. One of the black post-it notes has the words Taxable Income on it in white, with a drawing below the words of two stacks of coins, asking the question, Are there tax ramifications to filing bankruptcy in MN?The concept of discharge can prove to be a bit confusing to individuals not directly involved in the field of bankruptcy. 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.

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 had been turned into income, and the bankruptcy will not discharge something categorized as 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.


We will assist you in a chapter 7 or chapter 13 bankruptcy to discharge your dent and certainly answer any questions to the best of our ability. If you are thinking about debt settlements in MN, 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 help.


Topics: Taxes, bankruptcy in minnesota

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