Is Discharged Mortgage Debt in Chapter 7 Bankruptcy Taxable?

Chapter 7 bankruptcy discharges your debts, with your assets sold to help make up what you owe. It might seem like you'd have to pay income tax on those debts, but we have some good news. The IRS gives you a break on paying taxes on bankruptcies. Yes, that includes mortgage debt discharged in your Chapter 7 case.

The Craig Black Law Firm knows that bankruptcy protection comes with benefits. If you're considering bankruptcy, get in touch with me at 678-888-1778 or complete my confidential contact form, and I'll reach out.

Taxes and Bankruptcy

If you've filed for bankruptcy, you won't owe taxes on discharged mortgage debts. You'll still need to file taxes throughout your bankruptcy, of course, but there's no requirement to report the mortgage debt that was discharged.

It can get confusing, though, if you receive a Form 1099-C, Cancellation of Debt, in the mail at tax time. Don't worry. Sometimes, mortgage companies send those in bulk to everyone whose debt was discharged in bankruptcy during the tax year.

Form 982 and Bankruptcy

While you're filing your taxes, you'll need to get your hands on Form 982. This form is where you input all debt discharged during bankruptcy. While you don't have to pay taxes on your discharged mortgage debt, you will need to complete this form.

One area of confusion is exactly how to mark Form 982. Line 1a refers to the “discharge of indebtedness in a Title 11 case.” Title 11 is also known as the U.S. Bankruptcy Code. You'll simply check that line and detail the amount of discharge in Part II.

Mortgage Forgiveness and Taxability

Before you breathe a sigh of relief that you filed for bankruptcy, it's important to note the Mortgage Forgiveness Debt Relief Act of 2007. This legislation protects mortgage forgiveness from taxes. Here's what you need to know about it:

· The act covers any debt forgiven between 2021 and 2025

· The act expires in 2025, but it may be extended

· It only protects debt forgiveness related to your primary residence

· If you do find yourself owing taxes, take a look at the insolvency exclusion to see if it might help

This means the IRS doesn't take taxes on mortgage debt, whether you've filed for bankruptcy or not. That isn't always the case, though, so bankruptcy will provide protection if the act someday isn't renewed.

When You Owe Taxes

When it comes to taxation on debt, you'll know you have to pay taxes if you receive Form 1099-C in the mail at tax time. Sometimes, forms are sent by mistake, though, so if you receive a form, it's important to contact your tax preparer or, if you have bankruptcy protection, your attorney.

Legal Help with Bankruptcy Protection

If you're facing mounting debts, Chapter 7 might be the right choice for you. Contact me at 678-888-1778 or complete my confidential online form, and I'll work with you to determine the best course of action.