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
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.