Bankruptcy and Taxes - Chapter 7, Chapter 11, Chapter 12, Chapter 13
If you filed for bankruptcy, it important to know the tax ramifications of insolvency or bankruptcy. Generally any debt you owe that is canceled, forgiven or discharged becomes taxable income to you and will need to be reported on your tax return. You should receive a Form 1099-C - Cancellation of Debt from the creditor or lender that forgave the debt. Reasons that you will receive a 1099-C might be foreclosure, repossession, abandonment of property or return of property to a lender, or modification of a loan on your principal residence. When you prepare your tax return on efile.com, and indicate that you had a bankruptcy during the tax year, we will prepare any forms that you need to report this to the IRS when you file your tax return.
What is Insolvency?
A taxpayer reaches insolvency when their liabilities exceed their total assets. Generally, you must include forgiven debt as income on your tax return. If you are insolvent and you have debt forgiven by a lender, you can exclude that debt from income on your tax return through the insolvency exclusion.
What Are the Types of Bankruptcy?
Chapter 12 or 13
Individuals that file a petition for Chapter 12 or 13 of the Bankruptcy Code should continue to file the same federal income tax return. Include all income received during the year on your tax return. However, do not include any debt canceled as income on your return. You must reduce losses in property by the amount of canceled debt.
Chapter 7 or 11
When you file for bankruptcy under Chapter 7 or 11 of the Bankruptcy Code a separate estate is created that is made up of property that belonged to you prior to the filing date. The bankruptcy estate is a separate entity from you as a taxpayer. Under chapter 7, the estate is placed in the care of a trustee appointed by the court to liquidate your nonexempt assets. In a chapter 11 filing, the debtor stays in control of the estate as a debtor-in-possession. All wages and income following the bankruptcy filing are yours and not subject to the obligations of the bankruptcy estate. If your bankruptcy filing is rejected, you will have to amend your taxes with a Form 1040X as if you had never filed the claim.
You must file an income tax return during the period of bankruptcy proceedings. However, you should not include income, deductions, or credits belonging to the separately created bankruptcy estate. You have the option of ending the tax year on the day prior to submitting your bankruptcy petition.
Here is more information on individual bankruptcy, or the bankruptcy of corporations