The Bankruptcy Process

• The two most common types of personal bankruptcies are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, any remaining assets are distributed to creditors and the slate is wiped clean. Discharge is granted almost immediately. In Chapter 13, payment arrangements are made with the creditors and the bankruptcy remains active until all agreed-upon payments have been made. A Chapter 13 could last for a year or more. There are fees and expenses involved with both types of bankruptcy filings.
  
  

Bankruptcy Fees

• Every bankruptcy filing must be accompanied by a filing fee to the courts, which can range from $274 to $299. On top of that, attorneys charge for handling bankruptcies. A Chapter 7 filing is more simplified than a Chapter 13, and you can expect to pay attorney fees of $1,200 to $4,000. A Chapter 13 filing ranges from $3,000 to $4,500 and often requires a down payment before work is started. The rest of the Chapter 13 fee is withdrawn from the bankruptcy estate over a period of months. None of these fees relate to taxable income and, therefore, none are tax-deductible.
  
  

Exclusion of Cancelled Debt Income

• One possible tax benefit related to a bankruptcy filing is the Internal Revenue Service exclusion of canceled debt income. If you have creditors forgive all or part of your debts outside of a bankruptcy filing, you will have to pay tax on the forgiven portion of the debt as it is considered to be taxable income. During a bankruptcy, however, the IRS allows you to exclude the forgiven debt from income and you do not have to pay income tax on it.
  
  

Deductible Accounting and Legal Fees

• After discharge from bankruptcy, you may have legal fees and other expenses that are tax-deductible. Any fee you pay to a lawyer or accountant to prepare your income tax returns or otherwise handle your tax affairs is deductible against taxable income. If you build an investment portfolio, brokerage fees and other investment expenses may be deductible against your investment income. If you are unsure as to whether an expense is deductible, keep receipts or other documentation and discuss it with your tax preparer.