There is no adverse tax consequence when you discharge debt in a bankruptcy. Federal law provides that all of the debt that you discharge in your bankruptcy is not taxed as income. This is in contrast to the debt that might be forgiven or written off in a non-bankruptcy debt management program. In these non-bankruptcy programs, all of the debt that you do not pay and which is forgiven by the creditor is reported to the IRS – and you are taxed on it as if it was income to you! So the savings that a consumer typically thinks he is getting in a debt management program is not as much as it may appear because of the tax consequences.
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