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Typically the filing of a bankruptcy, whether it be a chapter 7 or a chapter 13 eliminates any type of tax liability with regard to the discharged debt.  You might find that a creditor will send you a 1099C at some point after you file for bankruptcy.  However, if you contact your accountant or your CPA or your tax preparer, they will likely advise you that the debt does not have to be or that the tax on the debt does not have to be included in your taxable income because you eliminated it in your bankruptcy case.  Many creditors will simply send those statements not knowing whether or not you have filed for bankruptcy and not really caring what the tax consequences are.  It’s almost a routine motion that some creditors go through with regard to issuing 1099C’s.
You, however, should rest assured that filing a bankruptcy will eliminate the debt and it will eliminate the tax ramifications concerning your debt.  If you have any questions at all, contact your attorney, your accountant, your CPA or your tax preparer.
Now, if you don’t file for bankruptcy and there is a surrender or a cancellation of the debt, then you are responsible for the tax on that.  In that case, you must include that taxable portion in your income and pay income taxes on it.  So filing bankruptcy might be the best way not only to get out of debt but to eliminate the tax debt that corresponds to any kind of cancellation of debt by either a mortgage company, a finance company or any other creditor.
As with any type of tax issue, it is best to consult with a tax professional so that you get the best possible advice available.  If you do not have a tax professional, contact your attorney who should be able to make a recommendation for you.
 
 

You must list everybody that you owe and everything that you own on a bankruptcy petition.  It doesn’t matter if the item is paid in full or if there’s money owed on it or if you have a partial interest, if you have any interest or owe any money or even if it’s paid, you must list all of your property.
There are a couple important schedules with regard to property.  The first important schedule is Schedule A which deals with real estate.  You must list all of the real estate that you own, either entirely or partially, owned outright or not, in your name anywhere in the world.  This means that if you have a house in one state and you have a vacation home somewhere else or even a timeshare that can be used anywhere in the world, you must list those items.
Secondly, Schedule B talks about all of your personal property.  You must list bank accounts, furniture, vehicles, retirement accounts, stocks, and bonds, anything else that produces income for you.  You must disclose whether or not you have a personal injury case pending, whether it be for Worker’s Comp or for straight injury.  You must list everything that you owe in your petition.  There’s even a catchall section called Other which lists all other personal property that wasn’t previously asked about.  So there is no way to avoid listing everybody that you owe money to on your petition.
Some people think because they have a paid off vehicle, they don’t need to listed.  This couldn’t be farther from the truth.  Some people think that because the property is being held by a family member, they don’t need to list it.  This also couldn’t be farther from the truth.  You must list every single piece of property that you own whether it be real estate or otherwise and you must disclose every interest in any property wherever held in the world.
 
 

It’s that time again. Time to explain why filing personal bankruptcy can provide enormous tax savings. Every year, several of our bankruptcy clients contact us in January or February because they have received a 1099-C form filed with the IRS by one of their former creditors. In case you don’t know, debts that are “canceled” or “forgiven” by a creditor may in some cases be treated as though you received that amount as taxable income under IRS rules. While this may seem inherently unfair to the ordinary person who receives a 1099-C—after all, she didn’t actually receive any income—the law can in many circumstances nevertheless treat the benefit she received by not having to pay that “canceled” debt as though it were taxable income.
By far the best protection from 1099-C liability, and the one I want to discuss here, is filing personal bankruptcy. If the reason that a given debt was “canceled” was because it was actually discharged in bankruptcy, then that debt is entirely excluded from one’s income, and there is no tax liability for such discharged debt. This is just one more reason why private debt settlement programs can’t offer the kind of debt relief that bankruptcy can. This is a huge relief to bankruptcy clients who are understandably shocked to receive a 1099-C from their former credit card company, or home equity line lender, or other commercial creditor. Imagine, receiving one of these listing $100,000 plus of debt you know was discharged in your bankruptcy case but now thinking that you might owe taxes on that discharged debt! Fortunately, we can quickly assuage our clients’ fears by explaining that, no, they will not owe any taxes on the debts that were discharged in their bankruptcy.
Unfortunately, it seems, many less well-versed tax preparers seem oblivious to the exclusion of debt discharged in bankruptcy from tax liability. So, even though we are bankruptcy attorneys, we have to put on our tax hats for a moment, and advise our client or former client to direct their tax preparer to IRS Publication 4681, which explains the bankruptcy exclusion for discharged debts along with other exceptions from liability on canceled debt. If the tax preparer knows what she is doing, she will prepare an IRS Form 982 to appropriately claim the exclusion for debts discharged under “Title 11,” which by the way is the Bankruptcy Code. Why the IRS can’t make this more clear for ordinary people by simply referring to the “Bankruptcy Code” on their form is beyond me, but I guess that would be too easy. If the client’s tax preparer is unaware of Form 982, I generally tell them it’s time to find a new tax preparer.
However—and this is really important—for the bankruptcy exclusion to apply, the debt must have been discharged by order of the Bankruptcy Court or by a plan approved by the court. This little pitfall can mean disaster, for example, if a lender on a recourse second mortgage, such as a home equity line, “forgives” or “cancels” the debt prior to the filing of the homeowner’s Chapter 7 or Chapter 13 bankruptcy case. For example, a short sale completed where there is a home equity line prior to bankruptcy may be the worst course of action from a tax perspective. This is yet another reason why it is so critical that if you are facing financial hardship, you should consult with an experienced bankruptcy attorney as early as possible.
There are other exceptions to 1099-C tax liability for sure. For one, the Mortgage Debt Relief Act of 2007 provided that homeowners could exclude from their income debt forgiven on their principal residence through 2012, but that law offered no help for recourse loans on second homes or for other types of debt. In California, most first mortgages even on second homes are treated as non-recourse loans, so they likewise don’t trigger any tax liability post-foreclosure. Additionally, the “insolvency” exception, may also be claimed on Form 982 without having filed a bankruptcy. However, the IRS definition of “insolvency” is substantially different than in bankruptcy because one’s retirement savings in accounts like 401(k)s and IRAs must be included in one’s net worth, while they may be entirely exempted in a bankruptcy case.
The bottom line is that personal bankruptcy filed before a given debt is “canceled” by a lender is the best protection against the IRS treating that canceled debt as though it were income and thus being taxed on it.

In a typical bankruptcy case, you are never going to see a judge.  In a chapter 7, you’re going to see a bankruptcy trustee.  The trustee is a person appointed by the bankruptcy court to administer your case.  The trustee wants to make sure that you are listing all your assets and all your liabilities and you are answering truthful questions to the statement of financial affairs.  The trustee’s job is to see if there are any nonexempt assets that can be taken, sold and administered for the benefit of your creditors.
The only time that you would see a judge is typically if there’s going to be a hearing with regard to whether or not the debt that you reaffirm on, which means the debt that you keep, is going to cause you an undue hardship.  In some cases, judges want to make sure that reaffirmed debts, particularly on vehicles, can be afforded.  If the Schedules I and J show that you as the debtor have a negative disposable income per month, then it is certainly within the court’s discretion to hold a reaffirmation hearing to determine whether or not you have the ability to make that payment going forward.  This is part of the consumer protection portion of the bankruptcy code.  If the judge feels that you do not have the ability to make the payment going forward, he can disregard or disallow the executed reaffirmation agreement between you and your creditor.
That is the only time you would typically see a judge in a chapter 7 bankruptcy case.  The exception to this would be if there is an adversary case filed in your bankruptcy.  An adversary case is a separate lawsuit within the bankruptcy court claiming that a debt that you owe is nondischargeable.  The court would have to make a determination after a hearing or trial based on the evidence in the case and whether or not you are entitled to a discharge of that debt.  Other than that, you would typically not see a judge in a chapter 7 bankruptcy case.