Home / Michigan Bankruptcy / What’s the difference between the cancellation of a debt or the discharge of that same debt in a Michigan bankruptcy?

What’s the difference between the cancellation of a debt or the discharge of that same debt in a Michigan bankruptcy?

The difference has huge tax implications. Discharged debt is not taxed as income to you – BUT canceled debt is treated as income and taxed.

Let’s say that you owe $100,000 on an unsecured loan. You default after paying off $50,000 and you still owe $50,000. If your banks writes off the $50,000 balance and cancels the debt – they could send you a 1099-C and require you to claim that $50,000 canceled amount as income on your tax return.

But let’s say that you file a Chapter 7 bankruptcy in Michigan. You list the $50,000 amount you owed as an unsecured obligation and it is discharged. There is no tax liability – Zero! And, if your creditor tries to nail you with a 1099-C you simply file IRS Form 982 which will exclude the $50,000 from your gross income.

Here’s the caution: Debt management and debt consolidation companies may be able to stop your creditors from harassing you on the phone – BUT- they can’t stop the IRS from taxing any canceled debts.