One common question that debtors have when they meet with a bankruptcy lawyer is whether they have to count the income that is discharged in bankruptcy as income on their tax returns. Common sense would say that yes, this income should be taxed as regular income just like it is when a debtor settles a debt with a creditor, however that is just not the case. You see, the tax code provides for an exception for income that is discharged in bankruptcy and debtors do not have to worry about counting this discharged debt as taxable income. This is one of the many benefits of opting to file for bankruptcy if you are on the fence.
If bankruptcy is not an option for you, a debtor may consider hiring a debt settlement lawyer to settle their debts for between 25-50% of the debt that they owe. In debt settlement, debtors are not protected by the bankruptcy automatic stay which prevents debt collectors from suing, calling or otherwise collecting on the debts. This also means that any debt forgiven in debts settlement is not protected from being counted as income on your tax returns. This is something to be considered if you are on the fence about whether to file for bankruptcy or attempting to settle your debts. Counting forgiven debt on your taxes will also apply if you have short sold a home (if there is no government exception in place as there was in years past) so often times a debtor may be better off by just allowing the home to foreclose. The amount of debt that is forgiven can be significant for instance if you settle $60K in debt for $30K or that amount is forgiven in a short sale, then you have to pay taxes on $30K.
If you have additional questions as to whether you will have to pay taxes on debts that are forgiven, make an appointment to speak to a debt relief expert by calling Symmes Law Group at 206-682-7975