Per IRS Publication 908 Bankruptcy Tax Guide
, page 2:
Bankruptcy proceedings begin with the filing of either a voluntary petition in the United States Bankruptcy Court, or in certain cases an involuntary petition filed by creditors. This filing creates the bankruptcy estate.
- The bankruptcy estate generally consists of all of the assets the individual or entity owns on the date the bankruptcy petition was filed.
- The bankruptcy estate is treated as a separate taxable entity for individuals filing bankruptcy petitions under chapter 7 or 11 of the Bankruptcy Code, discussed later.
- The tax obligations of taxable bankruptcy estates are discussed later under Individuals in Chapter 7 or 11.
Generally, when a debt owed to another person or entity 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 other tax benefits to which the debtor would otherwise be entitled. See Debt Cancellation