The Allmand Law Firm, PLLC Difference

Unlike most bankruptcy firms in the Dallas / Fort-Worth area, Allmand Law Firm, PLLC spends the time to understand the complete financial picture for every one of our clients. We provide resources, tools and advice to address the unique needs of North Texans.

Is Discharged Debt Taxable?

Posted By Allmand Law Firm, PLLC || 16-Jun-2017

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.

Blog Home