Question: I successfully filed for personal bankruptcy protection in 2025 under Chapter 7 to get out from under an overwhelming amount of credit card debt and back taxes created during the COVID years. Will I be responsible for paying taxes on any forgiveness or cancellation of the credit card debt?
Answer: If you borrow money (note: credit card debt is borrowed money) from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount as income for tax purposes, depending on your specific circumstances. When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When the obligation is subsequently forgiven, the amount you received as loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the Internal Revenue Service on Form 1099-C, Cancellation of Debt.
In your case, you defaulted on the loans and credit card debt, which is generally taxable income to you. However, there are some exceptions that may allow a taxpayer to escape paying tax on all or part of Cancellation of Debt income reported on Forms 1099-C. The most common situations when cancellation of debt income from credit card and other unsecured debt are not taxable are as follows:
1. Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
2. Insolvency: If you are insolvent when the debt was canceled, part or all of the canceled 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. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent.
Since you stated that you successfully filed for bankruptcy protection and presumably listed all your credit card debt within your filing, you should be able to meet the above exception. Good luck with your new start!
Barry Dolowich is a Certified Public Accountant and owner of an accounting and tax practice with offices in Monterey. He can be reached at 372-7200. Please address any questions to Barry at PO Box 710 Monterey, CA 93942 or email: bdolowich@gmail.com
