How to File Taxes After a Chapter 7 Discharge

Filing taxes after a Chapter 7 discharge looks like any other year with one added step: you attach Form 982 to your Form 1040 so the IRS knows the debt wiped out in bankruptcy is not taxable income. In the year you actually filed the petition, you also have a one-time choice about splitting your tax year. After that, your returns go back to normal, though a few tax benefits may be permanently reduced in exchange for excluding the discharged debt from your income.

Attach Form 982 to Your Return for the Discharge Year

When a creditor forgives a debt outside bankruptcy, the IRS usually treats the forgiven amount as income. Bankruptcy is the major exception. Under Section 108 of the Internal Revenue Code, debt discharged in a Title 11 case is excluded from your gross income entirely.¹ The exclusion is not automatic. You have to claim it by filing Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with your return for the year the discharge happened.²

The form itself is short. In Part I, check box 1a for “Discharge of indebtedness in a title 11 case.” On line 2, enter the total amount of debt that was discharged. Attach the form to your Form 1040.³

Paper filing is generally safer for a return carrying Form 982 or a special election. E-filing systems sometimes reject or mishandle returns with these annotations. Keep copies of your return, Form 982, your discharge order, and any 1099-C forms in your records for at least three years.

What to Do if You Receive a 1099-C

Creditors are generally not required to issue a Form 1099-C for consumer debt discharged in bankruptcy. The reporting requirement applies mainly to business and investment debts.⁴ Some creditors send one anyway, either out of caution or by mistake. If a 1099-C shows up for a debt that was included in your Chapter 7 case, don’t ignore it and don’t treat it as income. File Form 982 as described above. It tells the IRS the amount on the 1099-C is excluded under the bankruptcy exception, and the two forms effectively cancel each other out.

The One-Time Choice to Split Your Tax Year

This only matters in the calendar year you actually filed your bankruptcy petition. Under Section 1398 of the Internal Revenue Code, you can elect to split that year into two short tax years. The first runs from January 1 through the day before your filing date; the second runs from your filing date through December 31.⁵

The reason to do it: any income tax you owe for that first short year becomes a claim against the bankruptcy estate. If the estate has assets, the trustee may pay that tax from estate funds, reducing what you owe personally. That works well when you had significant income early in the year and then filed partway through.

The election isn’t available to everyone. You cannot make it if you have no assets other than exempt property, because there would be nothing in the estate to pay the tax.⁵ Most Chapter 7 cases are no-asset cases, so for many filers this option is off the table. Even when non-exempt assets exist, the election isn’t worth the added complexity if your pre-filing income was modest.

To make the election, file a Form 1040 for the first short tax year with “Section 1398 Election” written at the top. The return is due by the 15th day of the fourth full month after the first short year ends. If you filed bankruptcy on July 15, for example, the first short year ends July 14, and the return is due by November 15. You can also make the election by attaching a statement to Form 4868 (the extension request) saying you are electing to close your tax year under Section 1398(d)(2).⁶ Once made, the election is irrevocable. A spouse can join, but only if you both file a joint return for that first short year.⁵

If you split the year, write “Section 1398 Election” at the top of the first short-year return and “Second Short Year Return After Section 1398 Election” at the top of the second.⁶ Attach Form 982 to whichever return covers the period when the discharge occurred. If you don’t split the year, file a single Form 1040 for the full calendar year with Form 982 attached, and don’t include income or deductions that belong to the bankruptcy estate. The standard filing deadline for 2025 returns is April 15, 2026.⁷

What Happens to Your Tax Refund

A refund you’re owed for the period before your bankruptcy filing is property of the bankruptcy estate, just like any other asset you owned on the filing date. If you filed in August and later claim a refund covering January through July, the trustee can take that refund to pay creditors. The trustee can even file an amended return on your behalf to claim a refund you didn’t request.⁶

Refunds tied to income earned after your filing date are yours to keep. The IRS can also offset a pre-petition refund against a pre-petition tax debt even while the automatic stay is in effect, so don’t count on receiving a refund if you owed back taxes when you filed.⁶ Some filers protect part of a refund through bankruptcy exemptions, but exemption rules vary by state. Ask your bankruptcy attorney before filing, because timing your petition can change how much of your refund you keep.

Tax Attributes You’ll Lose in Exchange

Excluding discharged debt from income comes at a price. You have to reduce certain “tax attributes” by the amount of the excluded debt. Tax attributes are future tax benefits you’ve accumulated, such as loss carryovers or the cost basis in property you own. Reducing them means fewer deductions or larger taxable gains later.²

The reductions happen in a set statutory order, only after you calculate your tax for the discharge year:

Net operating losses for the discharge year and any NOL carryovers to that year.
General business credit carryovers, reduced at 33⅓ cents per dollar of excluded debt.
Minimum tax credit, reduced at 33⅓ cents per dollar.
Net capital loss for the discharge year and capital loss carryovers to that year.
Basis of property you hold at the start of the year after discharge.
Passive activity loss and credit carryovers.
Foreign tax credit carryovers.

The reduction follows this sequence until you’ve accounted for the full excluded amount or run out of attributes.¹ You can also elect on Form 982 to reduce the basis of depreciable property first, before touching other attributes, which sometimes helps preserve NOLs.³

For most individuals coming out of Chapter 7, basis reduction is the reduction that actually bites. Lowering the basis of property you keep widens the gap between what you paid and what you eventually sell for, producing a larger taxable gain down the road. Basis cannot be reduced below zero, and exempt property is protected from reduction entirely.⁸ Keep a copy of your Form 982 with your permanent tax records. Years later, when you sell a home or investment property whose basis was reduced, you’ll need those records to calculate the gain correctly.

Filing in the Years After Discharge

Starting the year after your discharge, your filing goes back to normal. You file a standard Form 1040. You don’t file Form 982 again, because the discharge was a one-time event, and you don’t need to mention the bankruptcy on future returns.

The lingering effect is the attribute reductions. If your NOLs or capital loss carryovers were reduced, you carry forward the lower amounts. If property basis was reduced, the lower basis stays with the property until you sell or otherwise dispose of it. Factor these into your planning if you have significant carryovers or property whose basis was cut.

Don’t Skip Filing, Even if You Can’t Pay

Bankruptcy doesn’t excuse you from filing tax returns, and the penalties add up quickly. The IRS charges 5% of your unpaid tax for each month or partial month a return is late, up to 25%. More than 60 days late, the minimum penalty is $525 or the full amount of tax owed, whichever is less.⁹

A late-filing problem can also spill into your bankruptcy case. The trustee or court may require you to stay current on filings as a condition of the process, and any new tax debt that arises after your filing date is not covered by the discharge. File on time even if you can’t pay in full. The failure-to-file penalty is almost always worse than the failure-to-pay penalty.

1
Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness
2
Internal Revenue Service. Instructions for Form 982
3
Internal Revenue Service. Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness
4
Internal Revenue Service. Instructions for Forms 1099-A and 1099-C
5
Office of the Law Revision Counsel. 26 USC 1398 – Rules Relating to Individuals Title 11 Cases
6
Internal Revenue Service. Publication 908 (2025), Bankruptcy Tax Guide
7
Consumer Financial Protection Bureau. Guide to Filing Your Taxes in 2026
8
Office of the Law Revision Counsel. 26 USC 1017 – Discharge of Indebtedness
9
Internal Revenue Service. Failure to File Penalty