What is Debt Discharge
Debt discharge is the cancellation of a debt due to a bankruptcy. During a chapter 7 or chapter 13 bankruptcy, if the debtor meets all of the conditions given by the court, they may have their debt discharged by the court. This means the debtor is no longer liable for the debt and the lender is no longer allowed to make attempts to collect the debt.
BREAKING DOWN Debt Discharge
Debt discharge often results in taxable income to the debtor unless the forgiveness is a gift or bequest, but some bankruptcy discharges can be exempt from taxability if the debtor meets the requirements for filing form 982 with the IRS.
When a debt is discharged, it is the result of a bankruptcy ruling. There are several ways that a debtor can be forgiven a debt. The two most common are when a debt is canceled or when a debt is discharged. When a debt is canceled by an institution, the institution decides they will likely not collect the debt and the remaining amount owed is forgiven. The debtor will usually receive a Form 1099-C that shows the amount of debt forgiven. The debtor must then report this as miscellaneous income on the 1040. The institution can receive a bad debt write-off for the amount of the debt uncollected which gives them a break on their taxes. When debt is discharged through a bankruptcy court, the lender can no longer make attempts to collect the debt and the debtor is no longer for paying back the debt. The debtor must file a form 982 with the IRS which can negate the taxability of the discharged debt if certain conditions are met.