The Tax Advantages of Bankruptcy Over Debt Forgiveness
You’ve lost your job or had to take a new one with less pay because of the pandemic. You’ve suffered an unexpected and uninsured illness or injury that’s left you in dire financial straits. You’ve considered filing for protection under the bankruptcy laws, but you’ve convinced yourself that working with a debt counselor and trying to get some of your creditors to forgive some of your debt is a better option, with none of the stigma of bankruptcy. Stop right there!! While debt forgiveness may feel a little warmer and fuzzier than a personal bankruptcy filing, it has the potential to cost you a lot.
Why Filing a Personal Bankruptcy Petition is Usually Better than Debt Forgiveness
The treatment of debt, at least for tax purposes, is completely different under a bankruptcy filing than it is when you have debt forgiven. With a Chapter 7 bankruptcy petition, you can permanently discharge certain debt without any tax consequences whatsoever. With the forgiveness of debt (outside of a bankruptcy filing), the law treats the forgiveness as a “benefit conferred” to you. In layman’s terms, that means that any amount forgiven by a creditor will be considered income, and must be reported as such when you file your income tax return.
What does that all mean? If you have outstanding debts—loans from a family member or friend, medical bills or credit card debt—and the creditor agrees to wipe them out, don’t be surprised if the IRS requires you to list the amount on your next 1040. If you have mortgage debt and sell the house “short”—for less than the amount you owe the bank—the bank may send you a 1099 for the difference, if it is forgiven.
Contact an Experienced Rockwall, TX Bankruptcy Attorney
At the Law Offices of Carrie Weir, all potential clients are entitled to a free initial consultation. To arrange an appointment, contact my office online or call 972-772-3083. I handle Texas personal bankruptcy filingsin Kaufman County, Rockwall County, Collin County, Dallas County, Hunt County and the surrounding counties.
