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Bankruptcy is designed to provide a fresh financial start for people who are facing struggles with debt. Fortunately, the writers of the bankruptcy and tax codes were on the same page, as the tax laws governing discharged debts have a similar intention to help people recover from debt.
As a result, people who have had debts discharged through bankruptcy usually do not have to pay taxes on the debts they recently eliminated. Each case, however, is unique, and bankruptcy and tax laws may vary by state.
To learn more about your unique tax circumstances, connect with a local attorney for a free consultation by filling out the brief questionnaire below.
As a general rule, taxpayers who were able to eliminate debt through bankruptcy, such as through Chapter 7 or Chapter 13 bankruptcy, do not have to declare their lost debts as income on their tax returns. This is in direct contrast with debt settlement, where debts forgiven by creditors are considered taxable income.
In order to ensure that the discharged debts are treated properly, many people file Form 982, a publicly available tax document that reduces taxes as necessary in the wake of discharged debts. You can also find out more information on this form and taxes on discharged debts from the IRS.
Taxing discharged debts could add an unnecessary obstacle to an already fragile financial situation. So, since taxes on discharged debts in bankruptcy do not usually occur, filing bankruptcy may provide long-term debt relief with few tax consequences.
To learn more information about taxes on debts discharged in bankruptcy, contact a local bankruptcy lawyer today.
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