bill for discharged debt
I was told by an accountant that if I filed Chapter 7 bankruptcy,
the amount of debt discharged could be counted as income when I
file my taxes, thereby greatly increasing the amount of taxes I
must pay. Is this true? I understand the repercussions of bankruptcy
relief, but find it hard to understand why the IRS would feel that
a person so strapped that Chapter 7 bankruptcy was the only option
could afford to pay double the tax bill for the year.
Your accountant only told you half the story.
Bankruptcy is intended to give you a fresh start, and the tax laws
do not run contrary to this intention. While it is true that the
cancellation of indebtedness is considered income in a Chapter 7
bankruptcy, this income is not considered yours. If you are an individual
debtor who files for bankruptcy under Chapter 7 or Chapter 11 of
the bankruptcy code, a separate "estate" is created consisting
of property that belonged to you before the filing date. This bankruptcy
estate is a new taxable entity, completely separate from you as
an individual taxpayer.
The estate, under a Chapter 7 proceeding, is
represented by a trustee. The trustee is appointed by the bankruptcy
court to administer the estate and liquidate your nonexempt assets.
You, as the individual debtor, generally must file income tax returns
during the period of the bankruptcy proceedings. Do not include
on your return the income, deductions or credits belonging to the
separate bankruptcy estate. Also do not include as income on your
return the debts canceled because of bankruptcy. Publication
908 was last revised in 1996, but it is still a good source
of information as you go through this difficult time. Although the
publication may not need revising, you might consider revising the
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