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Do you pay taxes on debt discharged in bankruptcy?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
- Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
- Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
- Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
- Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.
- Non-recourse loans: A non-recourse loan is a loan for which the lender's only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
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In a Chapter 7 case, one can normally reopen a bankruptcy to add a creditor as long as the debt was incurred before the bankruptcy case was filed and the debtor simply forgot …to list the creditor on his or her petition. The court charges a filing fee of $155 to reopen a case and a $26 amendment fee to add the creditor (as of 2/11/05) plus you'll likely owe additional attorneys fees to do all the extra work. However, if one has a mortgage listed in their petition and the debtor reaffirmed the debt, then chances are the debtor is stuck with the debt once the Discharge and 60 days after the reaffirmation agreement is filed with the Court expire. If the debtor had the mortgage listed and didn't reaffirm the debt, then chances are the debtor can get out of the debt. . Under certain circumstances you can add debt after bankruptcy as illustrated by Robinson v.Mann.339F.2d547 (5th Cir.1964). Courts have the discretion to allow amendment of schedules after the expiration of the claims period under exceptional circumstances such as (1) the case is a no-asset one, (2) there is no fraud, and(3) the creditor was omitted through mistake or inadvertence.. In a chapter 7 no asset case, anyone creditor to whom the debtor owed money prior to filing is included in the bankruptcy, whether they were listed on the schedules or not. If an asset is administered, the debtor should attempt to list all creditors prior to the trustee administering assets. If they don't that debt will survive the bankruptcy. In chapter 13 cases, the debts should all be listed prior to confirmation. If they are not, and the creditor cannot share in any distribution of funds, the debt will survive the bankruptcy.
This is an intriguing question considering that the IRS does consider forgiven debt to be income normally. However, I have never seen the IRS pursue any of my clients for inc…ome taxes due to forgiven debt in bankruptcy. I stay as far away from the Tax Code as possible, though the answer may lie in there.Please note that nothing in this posting or in any other posting constitutes legal advice; this is simply my understanding of the facts, which I do not warrant, and I am not suggesting any course of action or inaction to any person.
Chapter 7: This chapter of bankruptcy law provides for a full liquidation of an entity's non-exempt property to satisfy creditors, and discharges all dischargeable debts …This is a legal process under Federal statutes that provides for rehabilitation of a debtor through the discharge of certain debts or through a debt repayment plan over a certain period of time. Creditors cannot contact the debtor during the bankruptcy. They must wait until it is fully discharged. There are three chapters of bankruptcy Answer I can't give a definitive answer, but I can relate what I have seen. I suppose to get a definitive answer one would need to look at the Tax Code, and I stay as far away from that as possible. However, I have never had a client come back and say they had any negative tax implications as a result of discharged debt in bankruptcy. I know the IRS can normally pursue forgiven debt as income, but for some reason (either because the Tax Code doesn't permit them to or because they simply opt not to) the IRS has never pursued any of my clients for forgiven (discharged) debt in bankruptcy to my knowledge. I have had a couple of situations where mortgage companies sent tax statements to clients who surrendered real estate in bankruptcy, but so far we have managed to get those resolved without any negative tax consequences. Please note that nothing in this posting or in any other posting constitutes legal advice; this is simply my understanding of the facts, which I do not warrant, and I am not suggesting any course of action or inaction to any person. Answer While cancelled debt is typically includible under the Internal Revenue Code as gross income, there are certain exceptions: 1. Debt that is cancelled through a bankruptcy is NOT taxable as income, 2. Debt cancelled when you are insolvent is NOT taxable as income to the extent of your insolvency. Therefore, there are no tax implications and it does not have to be reported on the tax return. The creditors will send you a 1099-C for cancellation of debt, but they should also check the "bankruptcy" box. Make sure they do this. :)
Answer Though no one "wants" to file bankruptcy, your question is valid. An income tax return is usually looked at as a lump sum of money to help get back on one's feet…. A down payment for a better car, a vacation for a family, etc. If you file a chapter 7, then no, you will not have your tax refund kept from you, UNLESS you owe back-taxes. Depending on how many years you may have owed taxes, you can also file bankruptcy on those. If you have to file a chapter 13, bankruptcy, then I am not sure. Ask your attorney, and a consultation with a bankruptcy attorney is usually free. Answer It is a good idea to check with your lawyer on this question because it may depend on what state you life in when you filed. I live in Pennsylvania and did indeed receive my refund. My sister, however, lived in New Orleans when she filed her taxes and moved back to Pennsylvania shortly thereafter. Within two weeks of receiving her refund, she received a letter from her tax office telling her she had to return the check to be applied to her bankruptcy creditors. She was even given a date that the check had to be returned by. Answer A lot of times the Trustee will order you to pay the refund to the courts to be distributed to creditors. I've seen this happen in Chapter 7 cases before. Answer This Q has been pushed around a lot here...and this is what I've pieced together: It depends...a bit on which circuit court your in and how they feel...and especially how much is involved...(obviously large amounts are wanted for creditors...and it just seems unfair for you to not pay someone your debt, because you didn't have the money, because you had too much withheld or prepaid...when the amount withheld/prepaid is entirely controllable by you! The withheld tax account at the IRS is really nothing more than a savings account to pay for the tax actually determined to be due). The other aspect is when you file for BK compared to when you made your money...If the overpaid tax is for a pre-petition filing period...most trustees want it...but if it really isn't - then you can argue it's post petition and yours. So say it's a refund for the past year and you filed BK in December.....well it was basically all withheld as part of the Jan-Dec period in your tax return...and its part of the BK...but if you filed BK in say March...well not much of it is really from the covered BK period - and much of the overpayment should be given to you. (Of course, things like not making $ or deductions evenly through the year can complicate the calculation). Sort of makes sense.
Absolutely not. Even in the BKs with the highest powered of lawyers...and Corporations....the last things done before filing BK is pay the sales and withholding taxes! In …most all states or taxing jurisdictions, (with California being one large notable exception), these are not taxes on "you", but money the business collects from others (customers or employees) on behalf of the State. They are trust funds....they not only won't ever be discharged....they carry direct, pierce any corporate shield, to the officers and involved parties, responsibility. Better take care of them one way or another ASAP. In the few places they may be legally considered the responsibility of the vendor, they may be discharged in the BK, (as situational as anything else), and would be a priorty claim and even allowed an extended bar date for filing a proof of claim.
There are several different types, or chapters, of BK. Probably the main aspect of each is that the court protects you from collection actions of your creditors while …a process to resolve your financial problems is decided. The court normally appoints a trustee to oversee your affairs, and you are restricted from entering or changing financial agreements without their agreeing. Some require a payment plan be established where for some period of years, you pay a percent of your earnings to the trustee for him to use to pay your creditors. You may also have to attend financial counseling sessions and such. If, after complying with the terms of the arrangement there is still debt unpaid, the court may dismiss it. Of course, certain types of debts are not able to be discharged (like child support), and ones that have a secured interest, like a mortgage on a house, have the ability to have the asset sold to pay the debt too. The important thing is the BK involves all your debts and all your assets...your assets are used to pay the debts...you are not just relieved of the debt...and again, secured debts get first call on the receipts from those specific assets. The purpose of BK is to eventally give you a "fresh start" without debts....that isn't to say a head start...no debts but the assets they provided.
Property taxes are not in your records so you dont have to worry about them, if your home goes to foreclosure and bank that owns the house will have to pay those taxes if thy …want to sell the home in the future, property taxes will be in the house records not yours ans The above is one opinion...likely not to be found any place else. Property taxes, while of record against the property you own, are the owner of the properties obligation. Taxes, including property taxes, are, like all debts and all assets, whether recorded somewhere or not, included in BK and as such will be handled as a pre-petition liability. They will be settled, albeit frequently paid in full because of their position in BK prorities, but also depending on the assets you have to settle other items. (BTW, if you were to maintain accounting records - say like a business, your property tax accrued liability would in fact be recorded there, like any other debt/payable). If your mortgage is in fact foreclosed, the taxes will not be part of the debt the bank or successful bidder needs to be concerned with as they will be settled by the bankruptcy estate.
Some debts, such as taxes (including payroll taxes, most student loans and unpaid wages) are not forgiven in bankruptcy even if you file, and will not be discharged even if yo…u are given bankruptcy relief of your other debts. And being in arrears in taxes may bar you from getting any bankruptcy relief at all . Talk to an attorney as soon as possible.
Generally, child support, fines and penalties, govt insured student loans....amybe a few more.
In ANY bankruptcy, whether or how much of your debt gets paid is dependent on what type it is, and more importantly, what your assets are. Your assets are used to pay yo…ur debts...have enough and 100% gets paid.
There is an excellent book that provides both a thorough perspective and key detail about chapter 7 and chapter 13 bankruptcy: "The New Bankruptcy, will it work for… You?" 3rd edition, by Stephen Elias (published in 2009 by Nolo). I found it in the public library for Colorado Springs at 346.078 E42N (Dewey decimal system).
Not only does it not have to pay, it will not pay your debts. Debts are not extinguished in bankruptcy. The creditors are prohibited from collecting them, assuming you get a d…ischarge. They still exist in some world of uncollectability.
No. Unlike some non-bankruptcy situations, debt wiped out in bankruptcy (any chapter) is NOT income to the debtor.
All unsecured Debt may be discharged in chapter 7,(credit cards, personal loans, and others) secured debts (such as car loans and mortgage), and other assets will be taken by …the estate, and will be used to repay the creditors, it is very important that you discuss this with your attorney if you are planning to keep your house or car, taxes owed, student loans will not be discharged... ans While virtually all debts MUST be included in your bankruptcy, (it is not a matter of picking and chosing..all must be included), some debts cannot be discharged, just like all assets MUST be listed but not all may be taken. Most noteably: Debts for gov't insured student loans and past and future child support are not dischargeable. Many assets like retirement accounts, household goods, a reasonable car, are not able to be used to satisfy debts.
No, discharge of debts through bankruptcy do not create taxable earned income. However, you can have Capital Gains or Losses if any real-estate was disposed in that bankruptcy….
No, discharged debt is considered a forgiveness of debt and not a bankruptcy. Bankruptcy can only happen as a result of bankruptcy court procedure. Certain loans can be discha…rged due to hardship or disability, especially if there is an insurance policy in force to cover such a situation. When a loan is forgiven due to hardship or disability, the debtor's credit rating is usually not affected.
Q: Are all of the debtor's debts discharged, or only some? A: Not all debts are discharged. The debts discharged vary under each chapter of the Bankruptcy Code. The Code speci…fically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy. Congress has determined that these types of debts are not dischargeable for public policy reasons (based either on the nature of the debt or the fact that the debts were incurred due to improper behavior of the debtor, such as the debtor's drunken driving). There are 19 categories of debt excepted from discharge under chapters 7, 11, and 12. A more limited list of exceptions applies to cases under chapter 13. The most common types of nondischargeable debts areCertain types of tax claims,Debts not set forth by the debtor on the lists and schedules the debtor must file with the court,Debts for spousal or child support or alimony,Debts for willful and malicious injuries to person or property,Debts to governmental units for fines and penalties,Debts for most government funded or guaranteed educational loans or benefit overpayments,Debts for personal injury caused by the debtor's operation of a motor vehicle while intoxicated,Debts owed to certain tax-advantaged retirement plans, andDebts for certain condominium or cooperative housing fees. Wanna know more? Go here: http://bankruptcy.findlaw.com/bankruptcy/is-bankruptcy-right/debt-discharge-faq.html