, Answering FAQ'sTurboTax Employee
Bankruptcy is the legal status of a person or organization that cannot repay the debts it owes to creditors. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor, but sometimes can be forced on the debtor by creditors.
There are a number of different forms of bankruptcy, ranging from a Chapter 11 bankruptcy where the debts of the debtor are merely reorganized (the debtor has the means to repay some or all of the debt), to a Chapter 7 bankruptcy where the debts of the debtor are liquidated (the debtor does not have the means to pay most, if not all of the debt).
Filing for bankruptcy is very complex, so it's important that you speak with a bankruptcy lawyer, to make sure you do everything correctly.
What should I do? Generally, a bankruptcy will not have any impact on your income tax return, even though the cancellation of debt is normally taxable on your return. This is because any debts discharged in bankruptcy are specifically excluded from your income under the income tax rules. See Canceled Debt, Is It Taxable or Not?
If you receive a form 1099-C from one of the creditors whose debt was discharged in bankruptcy, you should enter the Form 1099-C information in TurboTax, and file Form 982.
Please note. If you have received a Form 1099-C, we recommend that you use the CD/Download version of TurboTax Premier. The cancellation of indebtedness is a complex topic, and the interview questions in the CD/Download version of TurboTax Premier will simplify your entries.
- Canceled Debt, Is It Taxable or Not?
- Form 1099-C, Cancellation of Debt
- Form 1099-A, Acquisition or Abandonment of Secured Property
- Form 982, Reduction of Tax Attributes