Does Bankruptcy Have Tax Consequences?
In most cases, filing for bankruptcy has far fewer tax consequences than other debt relief options. For instance, if you work out a debt settlement with a lender, and your debt is reduced, the IRS will likely consider the reduction income and tax you on it. If you settle with a mortgage lender, and your home loan is reduced by $100,000, you just “earned” $100,000 in income and will be taxed on every penny of it.
This does not happen in bankruptcy. If you file for bankruptcy and receive a 1099 form from a creditor claiming you made income from a discharged debt, you should file a 982 form advising the IRS that the debt was discharged in bankruptcy and should have no tax consequences.
Bankruptcy and the IRS
Filing for bankruptcy enacts the automatic stay, which stops creditors from taking collection actions against you, including actions by the IRS. However, it does not stop the IRS from auditing your, making tax assessments or demanding you file your tax returns. It is also important to note that filing for bankruptcy may affect your tax status in terms of what exemptions you are allowed or not allowed to take.
There are many tax considerations to make when filing for bankruptcy. Every case is different. If you have questions about how bankruptcy will affect your tax status, it is wise to consult with an experienced California bankruptcy lawyer.
For a free initial consultation about filing for bankruptcy with Simon Resnik Hayes LLP, call 888.368.4099 or contact us online. Our offices are open weekdays from 7:00 a.m. to 7:00 p.m., and we serve clients in the Los Angeles area and San Fernando Valley through offices in Sherman Oaks and Los Angeles.
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We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.