Tax Implication of Bankruptcy

Hello, this is Roger Ghai, and I wanted to speak to you today about the tax implications of filing a bankruptcy or the tax implications of not filing a bankruptcy. First of all, if you follow a bankruptcy case and the debt is forgiven, under the bankruptcy code, that is not construed as income. So let’s take a more concrete example. Let’s say, for example, you owe $25,000 in credit card bills, and you decide that you’re not going to file a bankruptcy, but you’re going to work out a payment arrangements or compromise the debt with the creditor. So let’s say on that $25,000, you ended up paying the creditors $5,000. Okay?
So that means that the other $20,000 of the 25 was wiped out by your creditors. And what they will do is they will file a 1099-C, usually, form with the IRS. And that means that you have to pay income tax on that $20,000. So if you have to pay income tax on that $20,000, you’re going to owe the IRS, probably, if in the typical example, and these are just rough estimates, about $8,000 in income tax. Now, that’s bad, because the problem is this. That if you can’t pay the IRS the $8,000, then that debt is non-dischargeable in case you file a bankruptcy case.
But let’s take the other scenario where you just say, “Okay, you know what? I throw up my hands. I really can’t foresee myself as being able to file, or excuse me, rather, I don’t see myself as able to pay those creditors, the credit card companies back the $25,000.” You can file, in certain circumstances, a chapter seven bankruptcy case in which you can completely wipe out the $25,000 in the debt that you owe the credit card companies, or it could be a medical bill, and you won’t own the IRS any money if you file a bankruptcy in that instance. So you’d wipe out all the credit card debt, you wouldn’t owe the IRS and you’d have truly a fresh financial start. So if you have questions about what is better for you, then just call my office at 770-792-1000.