Will My Debt Be Forgiven If I File for Bankruptcy?
Filing for personal bankruptcy is often a decision that consumers make when they are struggling with debt and do not have a way of getting back on track financially. While personal bankruptcy filings can also have other important benefits — such as allowing a debtor to stop a foreclosure and remain in their home through a Chapter 13 filing — one of the major benefits of a personal bankruptcy case is the discharge of debt. Not all kinds of debt are eligible for discharge under the US Bankruptcy Code, but many types of debts are dischargeable. A consumer’s debts can be discharged in both Chapter 7 and Chapter 13 bankruptcies, although Chapter 7 filings allow for a relatively swift discharge of all eligible debts while a portion of debts will need to be repaid by the debtor in a Chapter 13 case.
If you are considering bankruptcy and learning more about your options for having your debt discharged, you may have questions about how a discharge works in relation to debt forgiveness. Given that forgiveness and discharge are two separate things, it is important to understand the differences and what a discharge (rather than debt forgiveness) will mean for you in relation to your bankruptcy case.
Differences Between a Discharge and Forgiveness
The overarching difference between a discharge of debt and debt forgiven is this: with a discharge, you will no longer be legally liable for the debts that have been discharged, while a debt forgiveness (also called a cancellation) means that you no longer owe the amount of debt that has been forgiven.
There are some critical distinctions between the two when it comes to practicalities. With debt forgiveness, you will typically need to negotiate with a creditor who will ultimately agree to forgive a certain amount of your debt. With a discharge through bankruptcy, the creditor does not decide whether or not your debt is discharged — the bankruptcy court does. The taxation of forgiven debt versus discharged debt is also significantly different.
Taxation of Forgiven Debt Versus Discharged Debt
When you have any amount of debt forgiven, you will need to pay taxes on the amount that is forgiven. The way this typically works is that you will receive a cancellation of debt form from the IRS which identifies the amount of forgiven debt. When you file your taxes, the amount of forgiven debt will be treated as income, and you will need to pay income taxes on that amount.
Differently, when you have debt discharged in bankruptcy, you do not owe any taxes (or any additional costs) associated with discharged debt. Once the debt is discharged in your bankruptcy case, you are no longer liable for it and you will not have to pay anything related to it.
Contact Our West Palm Beach Bankruptcy Lawyers Today for Assistance
Do you have questions about personal bankruptcy, or specific questions about discharging debts? One of the experienced West Palm Beach bankruptcy attorneys at Kelley, Kaplan & Eller can speak with you today to answer your questions and to begin working with you on your bankruptcy filing. Contact us for more information.
Source:
law.cornell.edu/uscode/text/11
