As tax season approaches, many of our clients ask if their discharged debt will be treated as income on their federal income taxes. The answer is usually discharged debt in bankruptcy is not treated as income by the Internal Revenue Service (IRS). However, there are certain exceptions and you should confer with us regarding exceptions to the general rule.
Some creditors treat debt discharged in a Chapter 7, 11 or 13 as canceled debt, which can result in you receiving a 1099c form when the creditor files its tax return. Additionally, the IRS may require additional information before making a determination on your individual situation. Your debt must have been successfully discharged to be excluded from taxation. Thus, if you filed a bankruptcy case but it was dismissed before you obtained your discharge order, the general rule may not apply.
Insolvency is another way you may not be required to report anything on your federal tax returns. Being declared insolvent requires a complex analysis, but it generally occurs where you can prove that your debt exceeds the value of your assets at fair market value (including your property with lines or those considered exempt under bankruptcy law). For more information on this topic, read IRS publication p4681.
Contact the “Milwaukee Bankruptcy Attorneys,” DeLadurantey Law Office, LLC. DeLadurantey Law Office focuses on student loan debt, Chapter 7 and 13 bankruptcy, debtor’s rights, debt negotiations, debt relief, mortgage loan modifications, and foreclosure defense. A “defender of the little guy, “DeLadurantey Law Office serves the following location – Milwaukee, South Milwaukee, West Milwaukee, Waukesha City, Waukesha Town, Kenosha, Racine, and all other municipalities in Milwaukee County, Waukesha County, Kenosha County, and Racine County. We can be contacted by phone: (414) 377-0518 and can be found on the Internet and on Facebook.