Legal Question in Tax Law in Florida

Re: Can credit card debt discharged in a Chapter 7 be taxed as income after disc

In general, the improvement in one's financial circumstances resulting from the elimination of a debt is income -- just as if you earned $10 by cutting your neighbor's lawn and used the $10 to pay off a debt. It is called Cancellation of Debt Income (COD), or sometimes Discharge of Indebtedness Income (DOI). Creditors who write off or settle a debt are required to file a 1099 with the IRS, so it is not the credit card company that is at fault here.

Here's the bad news: the fault (I regret to tell you) is your's. The rules require you to report discharge of indebtedness income on your tax return.

And now the good news: There are two exceptions to the recognition of DOI under section 1398 of the Internal Revenue Code. Generally you do not have to include DOI in your income if at the time of the discharge you were insolvent or in bankruptcy (you were in bankruptcy).

So the bottom line is that the IRS is wrong, but you will have to prove to the Service that you were in bankruptcy at the time the debt was discharged.

For more information, see the article I wrote for the Maryland Society of Accountants on this subject. You can find it in the articles section of my website at www.bjhaynes.com.

Let me know if we can assist you.