Is Discharged Debt Taxable?
When filing for bankruptcy, there can often be confusion when it comes to taxes. One common question that people have is whether or not discharged debt is taxable.
Technically, under the United States Internal Revenue Code, debt that is discharged in bankruptcy is not taxable income. When you file for bankruptcy, discharged debt should not be reported or treated as taxable income.
Debt Forgiveness and Taxes
However, if you arrange a settlement with your creditors on a certain debt, the difference should be treated as taxable income. For example, if you owe $25,000 in credit card debt, and you negotiate with the credit card company to settle for $20,000, the forgiven debt difference of $5,000 would be treated as taxable income.
When there is a settlement with your creditors for a less amount than total debt owed in your bankruptcy, you should receive a Form 1099-C (Cancellation of Debt), which should be filed with your taxes. The amount of forgiven debt is taxable income, but discharged debt in bankruptcy is not.
Discharged Debt and Taxes
Debt that is discharged in bankruptcy is exempt to taxes. When your debt is discharged in bankruptcy, you should not receive a Form 1099-C from your creditors.
If you do receive a 1099-C from creditors, you should file a Form 982 with your IRS taxes, declaring that the debt was discharged in bankruptcy, and you should not have to pay taxes on it.
Michigan Bankruptcy Attorney
Dealing with bankruptcy, debt and taxes can be both stressful and confusing. Our team of experienced bankruptcy attorneys in Michigan is here to help.
For a free bankruptcy lawyer consultation, contact us online or call today at (734) 397-4540 to discuss your situation.