One of the most defining aspects of bankruptcy is the discharge of debts
that comes at the end of a case. Whether you file under
Chapter 7 or
Chapter 13 of the U.S. bankruptcy code, you will receive a discharge charge of your
debts following liquidation under Chapter 7, or the completion of a payment
plan under Chapter 13. This debt discharge frees you from obligations
to make payments on certain unsecured debts, such as credit card debt,
and it can provide the financial freedom needed to gain control of your finances.
Although a debt discharge does help consumers find a financial fresh start
after struggling with insurmountable debt, many people considering bankruptcy
or other forms of debt relief harbor concerns about tax implications.
With bankruptcy, discharged debts have no income tax consequences –
and it is excluded from gross income. However, individuals who have filed
bankruptcy and received a discharge may receive a form from the IRS regarding
Cancellation of Debt. This form can be completed and sent to the IRS informing
them that the debt was discharged in bankruptcy.
Although there are no income tax consequences to debt discharges, tax attributes
such as a loss, can pass to the bankruptcy estate and may be used by a
bankruptcy trustee when administering the estate. This is often the case
when businesses are involved.
Bankruptcy may not have tax implications for consumers, but other forms
of debt relief can. For example, credit card debt that has been partially
or fully cancelled with the help of a debt settlement company could result
in a tax bill for the debtor.
The IRS can even charge a tax if your home if foreclosed on if the value
of the house was less than what you owed on your mortgage. But debt that
is discharged in bankruptcy is never subject to taxation by the IRS, because
debt discharged in bankruptcy is never considered income.
If you are considering canceling debt using a debt settlement firm or if
you are preparing for a short-sale which will create “income”
in the eyes of the IRS you may want to consider the tax implications first.
Also before considering efforts to cancel individual debts, make sure
that those actions make measurable impacts on your financial situation.
Often debtors expend lots of energy using debt settlement that does not
help them in the long-term. To avoid this take, a look at all of your
debts when considering how you will tackle your financial problems.
For more information about your current financial situation, bankruptcy,
and tax implications, you can speak with a Dallas bankruptcy lawyer from
Allmand Law Firm, PLLC. Our legal team proudly serves the Dallas –
Fort Worth area and offers FREE financial empowerment sessions!
Contact us today to get started.