Most people who file bankruptcy don’t want anyone else to know.
Some of my clients try to hide their break for financial freedom from friends and neighbors.
Others are worried about their boss finding out.
Occasionally, someone will try to keep it from their mate.
But trying to hide his bankruptcy nearly cost one client $103,000!
Because he hid his bankruptcy filing from his accountant.
It’s all about the tax
When my client got his bankruptcy discharge, stripping off the junior lien on his house, the mortgage lender dutifully sent him a form 1099.
The tax form correctly reported that $288,000 of debt had been forgiven in the last tax year.
And my client delivered the 1099 to his tax preparer, who in turn said,
That will be an extra $103,000 in tax, due and payable on April 15th.
Only, once the tax preparer got the news about the bankruptcy filing, it wasn’t so.
Debt forgiven in bankruptcy isn’t taxable
A discharge in bankruptcy is the first exception to the standard tax rule that debt that is forgiven is treated as if it were cash income.
When the discharge occurs by reason of a case under Title 11, the discharged debt is not taxable income.