Tax Consequences of Bankruptcy

Bankruptcy will not result in an increase of your personal income tax. When a debt is discharged in bankruptcy, the discharge is not a taxable event and therefore will not result in an increase in your taxes.

The reason why there is some confusion about taxes and bankruptcy is that when a debt is normally forgiven or canceled, income tax is owed on the amount forgiven or canceled. The Internal Revenue Code negates this consequence if you file for bankruptcy.

Debt consolidation or settlement companies will not tell you that if the debt you owe to a creditor is reduced or canceled, you will be taxed on the amount of the debt that was reduced or canceled. You will not be taxed however if you were insolvent at the time of cancellation.

The Mortgage Debt Forgiveness Act of 2007 which expires in 2012, prevents most homeowners who are foreclosed on or who completed a short sale from owing taxed on the forgiven mortgage debt. Your attorney or accountant can explain this law, as there are exceptions to the taxable issue.

Contact Goldman & Beslow, LLC to discuss these issues,