Taxation of forgiven debt is generally taxable to the Debtor. However, one of the most beneficial aspects of bankruptcy is that debt discharged in a bankruptcy is not taxable to the Debtor.
All bankruptcy is governed by Title 11 of the United States Code. Section 108 of the Internal Revenue Code (26 U.S.C. §108) provides that gross income does not include any amount of income discharged in a case under Title 11 (Bankruptcy Code).
Creditors quite often send Debtors a Form 1099, which reports miscellaneous income to the Internal Revenue Service (hereinafter “IRS”), even after the Debtors have discharged the indebtedness in a Title 11 bankruptcy case.
The Debtors should use IRS Form 982 to report to the IRS that the debt was discharged in a Title 11 case.
I have attached a copy of the Form 982, which you can access by clicking on Form 982. If you have debt that has been discharged, check box 1a of Part I of the form and write the total amount of the debt discharged in line 2 of Part I.
Form 982 should be completed for the tax year in which the forgiven debt is reported to the IRS.