Introduction
This publication covers the federal income tax aspects of bankruptcy. Bankruptcy proceedings begin with the filing of a petition
with the
bankruptcy court. The filing of the petition creates a bankruptcy estate, which generally consists of all the assets of the
person filing the
bankruptcy petition. A separate taxable entity is created if the bankruptcy petition is filed by an individual under chapter
7 or chapter 11 of the
Bankruptcy Code. These chapters are explained later. The tax obligations of taxable estates are discussed later under The Bankruptcy
Estate.
The tax obligations of the person filing a bankruptcy petition (the debtor) vary depending on the bankruptcy chapter under
which the petition was
filed. For individuals, these are also explained in the first part of this publication. For other entities, see Partnerships and
Corporations , later.
Generally, when a debt owed to another is canceled the amount canceled or forgiven is considered income that is taxed to the
person owing the debt.
If a debt is canceled under a bankruptcy proceeding, the amount canceled is not income. However, the canceled debt reduces
the amount of other tax
benefits the debtor would otherwise be entitled to. See Debt Cancellation, later.
This publication is not intended to cover bankruptcy law in general, or to provide detailed discussions of the tax rules for
the more complex
corporate bankruptcy reorganizations or other highly technical transactions. In these cases, you should seek competent professional
advice.