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Ask Bankruptcy Attorney in Sacramento, Stockton, Fairfield, CA – Debts Discharged In Bankruptcy are Not Taxable

A question asked by my clients during a bankruptcy consultation at Sacramento and Stockton, CA office is whether debts discharged in Bankruptcy are taxable?

The answer is no.  Why did a family member or a friend receive a 1099-C form from their creditors after receiving a discharge from Chapter 7 or 13 Bankruptcy they asked.  Creditors must filed a 1099-C form for any debts $600 or more that is forgiven or cancelled.  Thus, debts settled for less than full payment is considered forgiven or cancelled debt for the forgiven amount.  As a result, you must report any taxable amount of a canceled debt as ordinary income from the cancellation of debt.  

You do not have to include the forgiven or cancelled debt as your income if the debt was discharged in Bankruptcy. https://www.irs.gov/taxtopics/tc431.html

It is up to the taxpayer or their tax preparer to file the necessary forms with the Internal Revenue Service and Franchise Tax Board to avoid paying the extra tax for discharged debts in Bankruptcy.

For more information about how Chapter 7 and 13 Bankruptcy can help you resolve your debts as well as IRS tax debt, schedule a bankruptcy consultation with Muoi Chea, experienced bankruptcy attorney in Sacramento, Stockton, Fairfield, CA to discuss your options.