Debts that are discharged as part of a court-approved bankruptcy should not be reported as taxable cancelled debt income, but some creditors mistakenly do so. The tax attorney should include a copy of the Discharge Order from the bankruptcy court when filing the return or during an examination. The bankruptcy exclusion will not apply if the taxpayer fails to obtain a bankruptcy discharge granted by the bankruptcy court or under a plan approved by the bankruptcy court.1 Make sure that the bankruptcy resulted in a discharge and not a dismissal.
- 1See I.R.C. § 108(C)(2); Hill v. Comm’r, T.C. Memo 2009-101; Schachner v. Comm’r, T.C. Summ. Op. 2006-188 (debt was not discharged or dischargeable in this Ch. 13 bankruptcy).