Tax Time & the Discharge of Debt

06 Feb Tax Time & the Discharge of Debt

One of the sterling features of a bankruptcy discharge is the fact that cancelling debts in bankruptcy has no tax consequences. Outside of bankruptcy, debt that is forgiven by the creditor is treated for tax purposes as though the debtor got that amount in cash. The creditor issues an IRS form 1099 and sends one to the debtor and one to the IRS. The debtor may have to pay taxes on the forgiven amount just as though it was actual income.

When the forgiveness of debt occurs in a bankruptcy case, Internal Revenue Code Section 108 specifically provides that it is not to be treated as income.

Should you get a 1099 for debts discharged in your bankruptcy case, file a form 982, which allows you to point out to the IRS that the discharge took place in bankruptcy and has no tax consequences.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.

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