If debts are discharged in bankruptcy, you generally do not owe income taxes on the amount forgiven. See the Internal Revenue Code, 26 U.S.C. Section 108(a)(1)(A). However, you may receive a 1099-C from a creditor. If you do, you may need to file IRS Form 982 with the IRS to make sure the IRS understands why you do not owe income taxes on the cancelled debt.

And if the debt was not cancelled in a banruptcy case, other exclusions may apply. Consult your tax advisor. The IRS encourages you to either read up on this area yourself, or hire a qualified tax advisor such as a Certified Public Accountant to help you. For a video from National Taxpayer Advocate Nina Olson concerning this matter, click here.

Also, bear in mind that even though you don't have to pay income taxes on debts discharged in bankruptcy, certain tax attributes that you may have are reduced to the extent your debts have been forgiven. For example, if you have a loss carryforward, this tax attribute may be reduced or eliminated, depending upon how much debt that was discharged in your bankruptcy case. Again, seek qualified tax help if you have questions.

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization