The greatest benefit to bankruptcy is getting your debts erased. It gives you the fresh financial start you need and deserve. And you do not have to pay taxes on the debts that are erased in bankruptcy.

“Forgiven Debt” Is Typically Considered Taxable Income by the IRS

The IRS considers “forgiven debt” as taxable income.

For example, if you settle a debt, the difference between the amount you owed and the amount you actually pay in the settlement is considered income for IRS purposes. Forgiven debt is supposed to be reported on your tax return as income.

This could mean that settling debts create new tax liabilities for you. New tax debts are not dischargeable (not erased) through bankruptcy.

Debt Discharged Through Bankruptcy Is Not Taxable

On the other hand, bankruptcy provides for the discharge of debt without tax consequences.

After a successful bankruptcy, you will receive a Bankruptcy Discharge Order from the Bankruptcy Court. The Order releases you from personal liability on your dischargeable debts. You are no longer legally obligated to pay back any debts that are part of your discharge order. The creditors of discharged debts can never legally attempt to collect payment on those debts. And you do not have to pay taxes on debts erased through bankruptcy.

Explore How Filing For Bankruptcy Protection Can Help You

When you are deep in debt and considering solutions, know that you have options for debt relief. The best option for you and your family will depend on your specific situation. If you’re considering if debt settlement is better than bankruptcy, read our article here. To explore the what bankruptcy can and cannot do, read our articles:


Obtaining A Financial “Fresh Start” From Burdensome Debts

Bankruptcy is your legal right and a tool to end your financial struggle. Bankruptcy has the power to:

  • Erase credit card debt.
  • Erase medical debt.
  • Erase most unsecured debt.
  • Stop harassing phone calls from creditors.
  • Stop wage garnishment.
  • Stop bank freezes and levies.
  • Stop lawsuits filed by creditors and other plaintiffs.
  • Puts an end to all collection action.
  • Allows you to keep most or all of your belongings, including your home and car (depending on your specific situation).


All of us here at the Law Office of Barbara B. Braziel want to help you get out from under the weight of financial stress and gain financial freedom. We invite you to get to know us here and read about the clients we’ve helped here.

Please reach out to us at (912) 351-9000 or contact us by filling out this simple web form. Follow us on Facebook for tips on getting out of debt!


We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.

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