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  1. #1
    Join Date
    Dec 2008
    Location
    Calif
    Posts
    289

    Default Taxes and Debt Forgiveness

    My question involves bankruptcy in the state of: Calif. I know if you work with the banks and offer to make deal on credit card debt, they will take a lesser amount. I know you can be taxed on the amount of the debt forgiven. If the amount forgiven is close to your standard deductions, could you end up paying little or no taxes on the amount forgiven? You're in a situation where you have no taxable income

  2. #2
    Join Date
    Sep 2010
    Posts
    19,901

    Default Re: Taxs and Debt Forgivness

    The debt forgiveness is INCOME. Your deductions reduce income, but don't really have anything to do with it. Every dollar forgiven will be taxable to you at what your marginal tax rate is.
    The only way you wouldn't owe additional tax is if your other income is so small that your deductions (standard or otherwise) was MORE than that income ($5950 for singles in 2012).

    If you are really talking BANKRUPTCY debts discharged or modified do not incur taxation for the action that occurs due to the bankruptcy.

  3. #3
    Join Date
    Sep 2005
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    Behind a Desk
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    98,846

    Default Re: Taxs and Debt Forgivness

    Although a creditor may well write off debts discharged in bankruptcy, the discharged debt is not taxed. Discharged debts are not treated as cancellation of indebtedness income, and are not taxable. If you receive a 1099-C for a discharged debt, you file IRS form 982.

  4. #4
    Join Date
    Dec 2008
    Location
    Calif
    Posts
    289

    Default Re: Taxs and Debt Forgivness

    I wanted to know about debt forgiveness, when you make a deal with the pay to pay off a portion of the debt. The part that is forgiven, is counted as taxable income. If the portion that is forgiven, is less then your deductions or slightly more, there should be little or no taxes owed. In that case would it be better to make a deal with the bank, BEFORE bankruptcy?

  5. #5
    Join Date
    Sep 2005
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    Behind a Desk
    Posts
    98,846

    Default Re: Taxs and Debt Forgivness

    If you don't incur tax liability, you don't incur tax liability. Six of one, half a dozen of the other.

  6. #6
    Join Date
    Dec 2008
    Location
    Calif
    Posts
    289

    Default Re: Taxs and Debt Forgivness

    Sorry, I missed the part where you do mention the 1099-C and form 982....reading alot of posts today.

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