August 12, 2022 By:
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.
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.