The Internal revenue Service (IRS) considers owing money the same way it views borrowing money. When you borrow money, it is considered income. But since you have to pay back that money, the IRS does not tax the money you borrowed. However, if a debt is canceled and you did not pay back that money, the IRS considers that as income and is subject to being taxed.
The United States tax laws are complicated if you are unsure, you should always get professional advice. When your debts are discharged in bankruptcy, one or more of your creditors may send you (and the IRS) a form 1099C. This form lists the amount you discharged in bankruptcy. You are not required to pay taxes on discharged debt in the bankruptcy process.
If you receive a 1099C, you can attach it to your tax form with a note explaining your situation and give them your bankruptcy case number and date of the discharge. A qualified tax professional will know how to handle this situation and give you more advice on the subject.
According to the IRS
“You are not required to report on Form 1099-C the following. 1. Certain bankruptcies. You are not required to report a debt discharged in bankruptcy unless you know from information included in your books and records that the debt was incurred for business or investment purposes. If you are required to report a business or investment debt discharged in bankruptcy, report it for the later of: a. The year in which the amount of discharged debt first can be determined, or b. The year in which the debt is discharged in bankruptcy.”
Filing bankruptcy can be a confusing process, hiring a Columbus bankruptcy attorney will help you get through the laws and get you the financial relief of your debt you are looking for.