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Are Debts Discharged During Bankruptcy Considered Taxable Income?

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Are my 401k and IRA protected in bankruptcy?”

An issue that can occasionally cause confusion during a personal bankruptcy concerns whether debt forgiveness can count towards a person’s income for tax purposes. If a company releases you of your obligation regarding a debt do you then have to report that to the IRS?


Calculator tape Charlotte Bankruptcy Lawyer Chapter 7 AttorneyDebt forgiveness as income


When reporting income to the IRS most people understand that wages, investments and several other sources all must be reported as income. However, what few people realize is that if you borrow money from a creditor and that lender later forgives or cancels the debt, then you may have to report that debt forgiveness as a form of income. For example, if a credit card company decides to waive the $10,000 debt you have incurred then that can count as income in some cases




So why should have to report not owing a debt as income? Tax regulations say that when you borrow money and have it forgiven you have benefited economically from that debt forgiveness, boosting your income by the amount you otherwise would have had to pay the lender. The amount of money forgiven by the lender is reported to the IRS on Form 1099-C, Cancellation of Debt. 

Exceptions to reporting rule


Though many times debt forgiveness counts as reportable income, there are several exceptions that allow taxpayers to avoid money for canceled debts. The first exception is that if a person is insolvent when the debt is forgiven then he or she will usually not be required to include the canceled debt as income. Insolvency exists when a person’s total debts exceed the total value of their assets.


The second exception, and one that matters in this case, is during bankruptcy. Debts that have been discharged through the bankruptcy process are not considered taxable income. Thus, if a person has had his or her debts forgiven in bankruptcy they do not have to then fear a whopping tax bill the following year.


If you find yourself needing the services of a Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC today at (704) 370-2828. As professionals who are experienced in the bankruptcy arena, our attorneys will provide you with the best advice for your particular situation.



“Personal bankruptcy and tax liability,” by Barry Dolowich, published at MontereyHerald.com.


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