This . explains the basic federal income tax aspects of bankruptcy.
A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest debtor a financial “fresh start”. This is accomplished through the bankruptcy discharge, which is a permanent injunction (court ordered prohibition) against the collection of certain debts as a personal liability of the debtor.
Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. This filing creates the bankruptcy estate.
•The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed.
•The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later.
•The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11.
Generally, when a debt owed to another person or entity is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. However, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. See Debt Cancellation, later.
A fundamental goal of the bankruptcy laws enacted by Congress is to give an honest debtor a financial “fresh start”. This is accomplished through the bankruptcy discharge, which is a permanent injunction (court ordered prohibition) against the collection of certain debts as a personal liability of the debtor.
Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. This filing creates the bankruptcy estate.
•The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed.
•The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later.
•The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11.
Generally, when a debt owed to another person or entity is canceled, the amount canceled or forgiven is considered income that is taxed to the person owing the debt. If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. However, the canceled debt reduces other tax benefits to which the debtor would otherwise be entitled. See Debt Cancellation, later.
