Is debt settled after dismissing Chapter 13 bankruptcy case, income tax exempt?
I filed a Chapter 13 bankruptcy, then dismissed it when I was not able to get a helpful deal from the creditors. I was able to get enough money together to settle with them after the case was dismissed. I have received the tax forms from them claiming that the debt might be considered income. Since this was debt settled after the case was dismissed, is it consider taxable income?
Posted November 1st, 2009 in Debt Settlement. Tagged: chapter 13 bankruptcy, creditors, enough money, tax forms, taxable income.
If the Chapter 13 was dismissed, it is as though it never happened.
November 1st, 2009 at 4:41 amYes, it could well be taxable income, as is the case with any legally forgiven debt. Thus, if your creditors wrote off a total of $20,000 and they report such to the IRS (and they WILL), you would need to claim that as taxable income in the year in which the debt was forgiven.
November 1st, 2009 at 4:41 amNo, it is not exempt. It’s taxable income to you. However if you were insolvent at the time of the debt forgiveness, the forgiven debt is not taxable to the extent that you are insolvent.
You are insolvent if your debts exceed the value of your assets. You claim this on Form 982 http://www.irs.gov/pub/irs-pdf/f982.pdf but will need to attach a set of financial statements to prove your insolvency.
For this reason it would be a good idea to seek professional assistance from a CPA or EA (NOT a seasonal part-timer at the tax prep mills!) if you are not familiar with the concepts behind setting up a balance sheet. You may want to weigh the cost of professional assistance vs just paying the tax on the forgiven debt. If the cost of professional assistance is more than the tax, it would make more sense to just pay the tax.
November 1st, 2009 at 4:41 am