How does a bankruptcy filing affect my tax status?

I’m talking here about personal income taxes. If you file individual bankruptcy (Chapter 7 or Chapter 13), then your bankruptcy case filing will stop any collections activity from the Internal Revenue Service or other taxing body. As far as discharging (wiping out) that tax debt, I can address that more fully in a different post, because it’s a complicated subject.

But if you do file bankruptcy, you will not need to report your filing to the IRS. If you receive your Discharge Order from the Bankruptcy Court, you will not need to report that to the IRS. There is no place on the federal tax return (Form 1040) to report that you’ve filed bankruptcy. The bottom line is that there will be no effect at all on your tax filing status. Simply put, it’s a tax-neutral event.

You may have read about Form 1099-C, which is a tax form issued for Cancellation of Debt. This occurs, for example, when you “settle” a debt, in other words, you pay off a debt for less than the full amount. Let’s say you have a credit card balance of $10,000. You offer to pay the creditor $4,000 to satisfy this debt in full. The creditor will be required to report the debt settlement to the IRS and issue to you a 1099-C Form in the amount of $6,000, which is the amount of debt that was cancelled.

A bankruptcy case filing will prevent the need to issue 1099-C Forms. The reason is that after your bankruptcy discharge, you don’t owe the debts anymore. The debts haven’t been “cancelled”. Instead, they’ve been discharged, which is obviously much better.

One Comment on “How does a bankruptcy filing affect my tax status?”

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