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This is a common question that comes from many of our clients. Whether you received a discharge in a Chapter 13 or a Chapter 7, the debts that have been discharged are not income for tax purposes. These debts have been discharged by Federal bankruptcy Court, and have not been forgiven or cancelled by your creditor. Therefore, you will not report any discharged debt as income on your tax return.
You will, however, receive a 1099-c from your creditor if you settled a debt for less than what you owe, or the creditor chose to cancel or write-off the debt. Suppose you owed a creditor $20,000.00 and you settled the debt for $5,000.00, you will receive a 1099-c from your creditor for $15,000.00. This must be reported as income on your tax return.
So, if you settled a debt for less than what you owed, you will receive a 1099-c that will be reported as income. However, if you receive a discharge of your debt either through a Chapter 7 or a Chapter 13, you will not have to report the discharged debt as income on your tax return.