Sole Proprietor - Bankruptcy

[Dana]

I have a client who filed Chapter 7 Bankruptcy this year. They went to court last week and the final paperwork won't be sent until Feb 2006. Creditors have until Feb to contest the discharge. Do I need to wait until Feb to "write off" the credit cards for the business? What accounts do you use when doing this? The liability account and ?

Thanks!

[Matt Sova]

bankruptcy

The client will probably receive 1099-C's for the cancellation of debt in 2006. When the liability is finally discharged you will reduce the liability and increase income.

Matt

[taxmandan]

Bankruptcy

The client will probably receive 1099-C's for the cancellation of debt in 2006. When the liability is finally discharged you will reduce the liability and increase income.

Matt

Debts discharged in bankruptcy are not put on a 1099-C, they are not cancelled, the debts are discharged and there is no reporting for tax purposes on the debt.

[Unregistered]

off books

How do you get the liabilities off the books?

Dana

[Gretel]

Credit Cards

I assume the credit card charges were credited and expense accounts debited. Since he never paid the expenses you will have to reverse these entries. He will not have income from cancellation of debt but income from the offset entries.

This is of top of my head. It wouldn't make any sense if he were allowed to take expenses. But maybe I am wrong.

[JON]

Bankruptcy???

All goes as forgiveness of debt-"usually" is not taxable. The forgiveness of debt is not taxable as long as it does not make you solvent... More than solvent should probably be the terminology.. Usually "7" discharge is not questioned as a taxable item in my world, but do not count on that in any other world...