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What is Bankruptcy?
Debtors who owe more money than they can pay, under federal law, can either eliminate their debts or develop a payment plan to pay all or a portion of their debts over time. Once a bankruptcy case is filed creditors must stop all collection efforts against the debtor. The Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the California Code of Civil Procedure are what control the possessions you can keep and other details.
Declaring Bankruptcy
Filing a petition with the bankruptcy court indicates the beginning of the bankruptcy proceedings and this is when a bankruptcy estate is created. The bankruptcy estate usually consists of all of the assets of the person filing the bankruptcy petition. If the bankruptcy petition is filed by an individual under Chapter 7 or Chapter 11 of the bankruptcy code a separate taxable entity is created.
Tax obligations will vary depending on which bankruptcy Chapter the petition is filed under. Debt canceled or forgiven is usually considered income that is taxed to the person who owes the debt. However, debt that is canceled under a bankruptcy proceeding is not considered income, but it does reduce the amount of other tax benefits the debtor is entitled to.