Discharged Debt and Taxation
Many debtors considering bankruptcy are concerned that debt discharged during bankruptcy is taxable by the IRS. The IRS does tax “cancelled” debt when they consider the cancelled debt income that’s improving the financial position of the taxpayer; but this is NEVER the case in bankruptcy. 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.
Bankruptcy Can Help You Discharge Your Debt
To find out how bankruptcy can help you discharge all or some of your debts, you can call us or fill out our contact form to set up a free consultation.