Will My Debt Relief be Taxed?
Did you know that if you have any debt that has been forgiven or canceled, you may owe income taxes on that amount of money? In other words, you may need to pay taxes on that amount of money as if it were part of your income. However, not all forgiven or canceled debt is taxable. As such, it is critical to understand when you may owe taxes on canceled debt and when you do not need to worry about it. Our Oak Park bankruptcy attorneys will provide you with some more information and examples to help clarify situations in which eliminated debt can be taxed.
When a Creditor Forgives Your Debt Outside Bankruptcy
Generally speaking, if a creditor forgives or cancels any of your debt outside of bankruptcy, the amount of money that is forgiven is treated as taxable income. To be clear, if you owe money and your debt is forgiven or a portion of it is discharged outside bankruptcy, whatever amount that you do not have to pay is considered canceled debt and is typically taxable as income. As the Internal Revenue Service (IRS) explains, “if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.” Yet there are exceptions, which we will explain shortly.
To give you an example, say you owe $10,000 on a credit card. If you cannot or do not repay the debt, there are multiple ways in which debt cancellation may happen. The creditor might simply stop collecting on the debt and write it off, which would mean you had $10,000 of debt canceled and can owe tax on that amount. Or, the creditor might reach an agreement with you where you repay $2,000 of that amount and $8,000 is forgiven, which means you would owe tax on $8,000.
When a creditor cancels debt in these contexts, you will likely receive a Form 1099-C in the mail, which is known as a “Cancellation of Debt” form. It will provide you with the amount of canceled debt that you must report on your income taxes. However, even if you do not receive a 1099-C in the mail, you should not assume that you do not owe taxes on the amount of canceled debt. To be sure, you may still owe taxes on the amount of debt canceled and should clarify the status of the debt with the creditor.
Debt Discharged Through Bankruptcy
Debt discharged through Chapter 7 or Chapter 13 bankruptcy is treated much differently from debt canceled in the contexts above. In a consumer bankruptcy case, the debtor does not owe any taxes on the amount of debt discharged because the IRS says that a person’s gross income does not include debt canceled through a Title 11 bankruptcy case (which includes both Chapter 7 and Chapter 13).
There are a number of other exceptions, as well, and you should seek legal advice to be sure about your situation.
Contact Our Oak Park Bankruptcy Lawyers
If you have questions about having debt forgiven or discharged through bankruptcy, an Oak Park consumer bankruptcy lawyer at our firm can assist you. Contact the Emerson Law Firm today.
See Related Blog Posts:
If I File for Bankruptcy, Can I Keep My House?
Five Things to Know About Liquidation Bankruptcy
When a Creditor Forgives Your Debt Outside Bankruptcy
Generally speaking, if a creditor forgives or cancels any of your debt outside of bankruptcy, the amount of money that is forgiven is treated as taxable income. To be clear, if you owe money and your debt is forgiven or a portion of it is discharged outside bankruptcy, whatever amount that you do not have to pay is considered canceled debt and is typically taxable as income. As the Internal Revenue Service (IRS) explains, “if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs.” Yet there are exceptions, which we will explain shortly.
To give you an example, say you owe $10,000 on a credit card. If you cannot or do not repay the debt, there are multiple ways in which debt cancellation may happen. The creditor might simply stop collecting on the debt and write it off, which would mean you had $10,000 of debt canceled and can owe tax on that amount. Or, the creditor might reach an agreement with you where you repay $2,000 of that amount and $8,000 is forgiven, which means you would owe tax on $8,000.
When a creditor cancels debt in these contexts, you will likely receive a Form 1099-C in the mail, which is known as a “Cancellation of Debt” form. It will provide you with the amount of canceled debt that you must report on your income taxes. However, even if you do not receive a 1099-C in the mail, you should not assume that you do not owe taxes on the amount of canceled debt. To be sure, you may still owe taxes on the amount of debt canceled and should clarify the status of the debt with the creditor.
Debt Discharged Through Bankruptcy
Debt discharged through Chapter 7 or Chapter 13 bankruptcy is treated much differently from debt canceled in the contexts above. In a consumer bankruptcy case, the debtor does not owe any taxes on the amount of debt discharged because the IRS says that a person’s gross income does not include debt canceled through a Title 11 bankruptcy case (which includes both Chapter 7 and Chapter 13).
There are a number of other exceptions, as well, and you should seek legal advice to be sure about your situation.
Contact Our Oak Park Bankruptcy Lawyers
If you have questions about having debt forgiven or discharged through bankruptcy, an Oak Park consumer bankruptcy lawyer at our firm can assist you. Contact the Emerson Law Firm today.
See Related Blog Posts:
If I File for Bankruptcy, Can I Keep My House?
Five Things to Know About Liquidation Bankruptcy
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