Tax obligations for discharged debt - say it isn't so?

[Coleslaw]

what are the tax obligations of cancelled debt?
what about business debt that I didn't personally guarantee, but might list in a personal CH 7 to protect me if the corporate veil was pierced?

If I get 300K in business/personal debts discharged, am I now on the hook for 50-100K to the IRS?

- Slaw

[despritfreya]

Right from the horse's mouth:

Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.

Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.

Insolvency: If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.

Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your cancelled debt is generally not considered taxable income.

Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.

These exceptions are discussed in detail in IRS Publication 4681.

http://www.irs.gov/pub/irs-pdf/p4681.pdf

DES.

[HHM]

"It isn't so"

Debt's discharged in BK are not taxable as forgiven debt income.

HOWEVER, you might still receive 1099-C's from lenders. Keep in mind, the 1099-C is MERELY informational; in the language of the IRS it is an "information return." The 1099-C by itself, does not create a tax liability. If you should receive a 1099-C, you will need to complete Form 982 to inform the IRS that you, in fact, filed BK.

[Coleslaw]

Ok, that's a relief!
Thanks!