If you file bankruptcy, can that debt be taxed? Then, making you liable for the tax.
1 Answer from Attorneys
I think what you are asking is are you taxed on the debt that is discharged in a bankruptcy. This is an excellent question because other types of debt relief are taxed. For example, if you negotiate a $10000 credit card debt down to $3000 then you may feel like you have come out ahead. But at the end of the year, the creditor that forgave the debt is required by Federal law to send you a 1099 at the end of the year for $7000 debt forgiveness.
Then, although you did not have to pay the money to your creditor, you will have to pay taxes on the amount that was forgiven. One advantage of bankruptcy that does not exist in most, if any, other forms of debt relief is that you do not have to pay taxes on the debt that is discharged.
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