Bankruptcy or Chapter 7 And Your Taxes
If you filed for bankruptcy, it is important to know the tax ramifications of insolvency or bankruptcy. Find ways to pay for taxes. Generally any debt you owe that is canceled, forgiven or discharged becomes taxable income and needs to be reported on your tax return. You should receive a eFileIT 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:
- 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, we will select and prepare any forms that you need to report your bankruptcy information to the IRS and that need to be filed with your return.
Types of Bankruptcy
- Tips and facts about Chapter 13 bankruptcy and delinquent tax returns
- 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 taxable 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 1040-X as if you had never filed the claim.
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.
You must file an income tax return during the period of bankruptcy proceedings. However, you should not include income, deductions, or tax 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.
Find more information see IRS Publication 908, Bankruptcy Tax Guide on individual bankruptcy or the bankruptcy of corporations.
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