This is the time of year when W2 forms start landing in mail boxes. And suddenly, that which has always been a rather mundane act of trotting down to Office Depot for the latest Turbo Tax becomes fraught with doubt. How does a bankruptcy case affect a tax filing?
The answer, fortunately, is that bankruptcy only occasionaly changes your income tax filings.
Outside of bankruptcy, if a creditor forgives your debt, they report this debt-forgiveness to the IRS and issue you a 1099(c). In other words, forgiven debt is treated as taxable income. There are two exceptions for being taxed on forgiven debt: (1) when the debtor is insolvent, and (2) when the debt was forgiven because of a bankruptcy case. Most creditors know this and so won't file a 1099(c) on your behalf.
The good news is that if you receive a 1099(c) from a creditor seeking to inspire the IRS to tax you on that forgiven debt, all you have to do is file a Form 982 with your taxes, alerting the IRS to the fact that the debt was discharged under Title 11.