Can you still owe money once you've filed Chatper 7 Bankruptcy?

Question

My parents filed chapter 7 bankruptcy including their home at the end of 2001. The bankruptcy was discharged in 02 and they relinquished their home(they did not reaffirm the debt). Recently my parents received a letter from the IRS stating they owe 15,000 due to a 1099 form the home lenders filled out for their loss from foreclosure.I thought once you were discharged you are then released from personal liability. What am I missing?

Answer 1

There are many exceptions, see below.  But this isn't about that.

When a lender forgives a debt, the forgiven amount becomes "income" and thus taxable.  Again, there are exceptions, and I think this will depend on the exact handling of the home at the time of bankruptcy.  Was the home and the mortgage actually an asset and liability in the bankruptcy?  Or was some accommodation made simultaneously, but outside the bankruptcy case?

You're going to need a lawyer, CPA, or enrolled agent on this one. Read this first: http://www.irs.gov/newsroom/article/0,,i...

Sorry, you case is too old to qualify for the exclusion this article discusses.

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But not all of an individual's debts are discharged in chapter 7. Debts not discharged include debts for alimony and child support, certain taxes, debts for certain educational benefit overpayments or loans made or guaranteed by a governmental unit, debts for willful and malicious injury by the debtor to another entity or to the property of another entity, debts for death or personal injury caused by the debtor's operation of a motor vehicle while the debtor was intoxicated from alcohol or other substances, and debts for certain criminal restitution orders.11 U.S.C. § 523(a). The debtor will continue to be liable for these types of debts to the extent that they are not paid in the chapter 7 case. Debts for money or property obtained by false pretenses, debts for fraud or defalcation while acting in a fiduciary capacity, and debts for willful and malicious injury by the debtor to another entity or to the property of another entity will be discharged unless a creditor timely files and prevails in an action to have such debts declared nondischargeable. 11 U.S.C. § 523(c); Fed. R. Bankr. P. 4007(c).

Answer 2

Money borrowed and never paid back is effectively income.  So they would typically owe tax on that money unless they can show that they were indigent. Did your parents have income in 2002 and 2003?  I don't know if merely filing bankruptcy is good enough.