This is a great question because it points out the difference between bankruptcy and other types of debt relief. If a bank forgives debt outside of bankruptcy, you must claim that amount as income on your taxes. The bank will send you a 1099-C form which you must file with your tax return and also pay tax on that amount as imputed income.
Conversely, if you file for bankruptcy relief, you are not given any tax forms to file with your tax return and you do not have to claim the discharged debt as income.
For example, if you owe Discover Bank $5000 and the Bank settles your debt outside of bankruptcy for a lump sum of $3500, you will have to pay tax on $1500 in that same tax year. However, if you file bankruptcy on that Discover Bank debt then you will discharge the entire $5000 and you will not have to report any amount on your taxes.
Discover how the bankruptcy attorney at Seelinger law can help you file for bankruptcy so that you can experience debt relief. Call us at (814) 824-6670 or contact us online to schedule your free consultation and take your first step towards financial freedom.
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