Is Debt Discharged in Bankruptcy Taxable?

Is Debt Discharged in Bankruptcy Taxable?

Is Debt Discharged in Bankruptcy Taxable?

This is one of the most common questions people have when considering to file bankruptcy, and the short answer is … NO!

Still every year my office still gets hundreds of phone calls at tax time from people who just received a 1099-A or 1099-C.

First, if a creditor has cancelled debt of $600.00 of more they may send you a 1099-C and if you did not file bankruptcy you could very well owe taxes on the debt that was forgiven.  If you did not file bankruptcy, this income may be taxable income, however as explained in IRS Publication 4681, you do not need to pay taxes on debt discharged in bankruptcy.

If your Form 1099 debt is subject to an exception found in IRS Publication 4681, you're off the hook. However, you still need to fill out IRS Form 982 and attach it to your federal tax returns. If you don't, the IRS could assume you are illegally failing to report income.

If you're still not sure whether you need to include your Form 1099 debt, consider talking to a tax preparer. It can often be a complicated analysis that requires professional help.

The taxable consequences of settling debt are just another reason why sometimes filing bankruptcy is the right thing to do. We offer a Free Confidential Consultation that will help you determine if debt settlement or bankruptcy may be right for you.