No Jail Time for Filing Bankruptcy

Surprisingly, there are still lots of misconceptions about filing bankruptcy including one falsehood that everyone should know – no jail time for filing bankruptcy.  The laws of the United States expressly permit the filing of bankruptcy to obtain financial relief.  Of course if you try to defraud the bankruptcy court you could find yourself serving time, but not for just taking advantage of the bankruptcy laws.

Similarly, many people ask me if there is a penalty with the IRS or if taxes will be owed if one files bankruptcy.  Here it is important to distinguish between owing taxes and then filing bankruptcy and being hit with taxes or penalties because you file for bankruptcy.

If you have tax debt and you need to file bankruptcy, your individual circumstance will determine if you have to pay the debt or if it can be discharged (wiped out).  However, there is no IRS penalty nor will you owe taxes because debt relief was afforded in bankruptcy.  If an individual creditor forgives your debt outside of the protection of the bankruptcy court, you may owe taxes for “relief of indebtedness income”, but not if that debt is discharged in bankruptcy.

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