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Ask Brent Blanchard Your Own Question
Brent Blanchard
Brent Blanchard, Bankruptcy Attorney
Category: Bankruptcy Law
Satisfied Customers: 1975
Experience:  Twelve years experience in all aspects of debtor & creditor BK.
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How does chapter 7 bankruptcy effect my tax return Am I required

Customer Question

How does chapter 7 bankruptcy effect my tax return?
Am I required to file extra forms with the return?
Is there any reportable cancelation of debt?
Submitted: 7 years ago.
Category: Bankruptcy Law
Expert:  Brent Blanchard replied 7 years ago.
Thank you for your questions.

No extra forms need to be filed with tax returns because of a bankruptcy. There is a pretty high chance that if there is a tax refund, that would need to be turned over to the Trustee, as that is usually a non-exempt asset that must be made available to the creditors.

The other exemptions in BK are generous enough that I consider it a fair price to pay in exchange for getting relief from the debts.

Debt forgiveness through bankruptcy, unlike from other ways, is NOT countable as income. Many people doing short sales on houses, or negotiating mortgages down on business properties, are going to get 1099-misc forms for the year they "got out from under the debt", which usually increases their taxes. They're still better off, but getting rid of debt without BK can, for example, cost $100 in federal tax for every $1,000 of debt forgiven, if the borrower is in the 10% tax bracket. I don't do state tax (none in NV), but don't forget that "income" too in a non-BK debt forgiveness setting.

Go forward with confidence. The BK code still provides relief, despite the "reforms" demanded by credit card companies a few years ago.

Thank you.