Do I Have to Report the Amount of Debt Discharged in Bankruptcy on My Tax Return?

Tax Return 1040ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions. 

Hi Leon,

I filed Chapter 7 bankruptcy earlier this year and got a discharge. Our bookkeeper says he needs to know the total amounts discharged for our 2013 tax return. My lawyer says he doesn’t know and I’ll have to pay more fees if I want him to try and find out. I didn’t see it on the discharge notice from the courts. I am going crazy trying to find the number.

Roger

Dear Roger,

You’re an early bird. This is a question I normally don’t see until tax season. I am sorry this is driving you crazy.

First, I’ll explain for you (and your lawyer) why you won’t find anything that lists the amount of money you discharged. Next, I’ll explain for you (and your lawyer and bookkeeper) why you don’t need to know the discharge amount for tax purposes.

Bankruptcy Doesn’t Discharge Specific Dollar Amounts

The bankruptcy court didn’t make a determination on the amount of any particular debt that you discharged. That’s why you can’t find the number anywhere. There are a number of reasons why bankruptcy law works this way.

There’s no point in figuring out exact amounts. Suppose you had an ongoing dispute over an amount that you owe to a bank – you say it’s $100 and the bank says it’s $150. If the debt is dischargeable, it doesn’t matter who is right. You don’t have to pay it, so why should the court figure out the exact amount?

Determining exact dollar figures would be costly and time-consuming. If the discharge did apply only to a specific dollar amount, then the court would have to determine that amount. This would require a court trial or some other time-consuming procedure to determine how much you owe for every debt that you have.

The amount you owe changes constantly due to interest. Most of the debts you discharged probably accrued interest during your bankruptcy case. Because of interest piling up every day, the amount you owe constantly changes. This means that even if there was no dispute over the amount you owed, you could almost never list the correct amount on your bankruptcy papers.

It’s much easier if the bankruptcy discharge simply eliminates an entire debt. So that is what the law does.

You Don’t Need Discharge Amounts for Your Tax Return

Luckily, you don’t need to know the amount of your discharged debt for tax reporting purposes. The amount of debt you have discharged in bankruptcy does not get taxed nor is it reportable as income. The figure does not go on your 1040 tax form. In fact, even if you wanted to put it on your form, there’s no place for it.

You can stop going crazy.

— Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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