Legal Question in Bankruptcy in California

Re: tax consequence

No, such income is specifically excluded from gross income under the Internal Revenue Code.

Re: tax consequence

No, such income is specifically excluded from gross income under the Internal Revenue Code. I should add, however, that if you have any tax attributes to which you are entitled, such as tax loss carryforwards, net operating losses, etc., then those may be reduced by the amount of debt relief you received. For most individuals, this is not an issue.

Re: tax consequence

Thanks for your question, which I think is a very good one. The answer is NO. The IRS is specifically not allowed to assess a "gain" based upon discharge of debts in a bankruptcy.

Interestingly enough, a creditor negotiating for you to pay a lower total amount on your debt IS a taxable gain. For example, if you pay $100 on a $1,000 debt, the $900 the creditor loses is considered a "gain" to you, and the creditor will send you a 1099 to deal with this.