Is Debt Forgiveness the Same as a Discharge?

If you are struggling with debt individually, or if your business is struggling to repay debt, you may be looking into options for debt relief. For individuals or businesses that have never filed for bankruptcy or discussed the possibility of bankruptcy with an attorney, it can be difficult to understand the precise meaning of certain terms. When you are investigating debt relief options, you may come across the terms “debt forgiveness” as well as “debt discharge.” In a bankruptcy case, in reorganization bankruptcies businesses can be eligible to have debts discharged, while individual filers can be eligible to have debts discharged in liquidation or reorganization bankruptcies. It is essential to understand that a discharge is distinct from debt forgiveness, and debt does not get “forgiven” through a bankruptcy filing. Our West Palm Beach bankruptcy lawyers can explain in more detail.

Understanding Debt Forgiveness 

In general, “debt forgiveness” refers to a situation in which a creditor does not believe it can collect the full amount of the debt owed from a debtor, and either stops attempting to collect or agrees to forgive an amount less than what the debtor owed as part of a debt settlement agreement. In other words, the creditor “forgives” some or all of the debt so that the debtor no longer owes the debt. When this happens, the debt will be considered “canceled” by the IRS, and the debtor will typically receive a cancellation of debt form — the amount of debt forgiven is taxable.

In a bankruptcy case, debt is not forgiven by a creditor. Instead, it is discharged by the bankruptcy court, and discharge has a different meaning from debt forgiveness.

Understanding the Process of Having Debt Discharged in Bankruptcy 

Unlike forgiven debt, when a debt is discharged in a bankruptcy case, the bankruptcy court is saying that the debtor is no longer liable for the debt, and the creditor is not permitted to pursue the debt or attempt to collect it from the debtor. As the US Courts explain, a bankruptcy discharge “releases the debtor from personal liability for certain specified debts.” Indeed, the discharge is “a permanent order prohibiting the creditors of the debtor from taking any form of collection action on discharged debts, including legal action and communications with the debtor, such as telephone calls, letters, and personal contacts.”

Unlike debt that is forgiven by a creditor, debt that is discharged in a bankruptcy case is not taxable — debtors do not owe taxes on the amount of debt discharged in their bankruptcy case.

Contact Our West Palm Beach Bankruptcy Attorneys Today for Assistance 

If you have any questions about filing for bankruptcy or seeking a discharge of your debts, an experienced West Palm Beach bankruptcy lawyer at Kelley, Fulton, Kaplan & Eller can speak with you today. We can answer any questions you have and can begin working with you on your bankruptcy case. Whether you are considering a reorganization bankruptcy as a business, or you are looking for additional information about liquidation or reorganization in an individual bankruptcy, our firm is here to assist you. Contact us today for more information.

Sources:

uscourts.gov/court-programs/bankruptcy/bankruptcy-basics/discharge-bankruptcy-bankruptcy-basics#:~:text=A%20bankruptcy%20discharge%20releases%20the,any%20debts%20that%20are%20discharged

irs.gov/taxtopics/tc431