Do I pay Taxes on Debts Discharged in Bankruptcy in New York City?
No. One of the biggest advantages of bankruptcy over other forms of debt consolidation is the elimination of any tax liabilities on your discharged debt. If you file bankruptcy there will be no taxes associated with your discharge. Any debts settled outside of bankruptcy on the other hand are considered taxable income by the IRS. You will be sent a 1099 and will likely have a significant tax liability if you are actually successful in any of the various debt consolidation programs being offered today. Bankruptcy however leverages the full force of the US Court system and is the only way to eliminate debt while avoiding taxes.
Taxpayers who file bankruptcy do not need to report the cancelled debt as taxable income according to title 26 U.S. Code § 108. When you complete the bankruptcy process your attorney in New York City may advise attaching IRS form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to your income tax return to keep things nice and tidy, but your discharge is protected from the IRS under Federal Bankruptcy law.
Settling debts outside of bankruptcy usually comes with a number of significant caveats you may not be told about up front including the likelihood of a hefty tax liability on your settled debt. When people think their debt trouble is in the clear and then receive a 1099 for taxable income on debt they hoped to never hear about again it hardly feels like a fresh start for most. Some people that go this route may even end up filing bankruptcy after all this trouble anyway. If you have serious debt troubles speak to a qualified bankruptcy attorney. Filing for bankruptcy is the most powerful debt elimination option available in New York City and the only way to avoid having your settled debt become taxable income.
If you live in New York City and have questions about how your bankruptcy discharge may be viewed by the IRS, please contact the Law Offices of William Waldner online or at 212. 244.2882 to arrange a free bankruptcy consultation today. Our law firm has never had a case dismissed and maintains a 99% Chapter 7 discharge record in New York City as of 8/31/16.
This article is intended for educational purposes only. By reading this article no attorney-client privilege has been created.