When a creditor writes off your debt, they frequently send a 1099 to the IRS reporting income to you for the amount written off. This is called discharge of indebtedness income and under the Internal Revenue Code can be taxed. There are two main exceptions: First, if you were insolvent at the time that your creditor wrote off that debt, then you won’t have to pay tax on it; you’ll fill out a schedule with your tax return demonstrating to the IRS that your debts, including the debt that was written off, exceeded your assets at that time.

But a much more straightforward way to avoid discharge of indebtedness income is to discharge the debt in a bankruptcy case. The Internal Revenue Code says that debts discharged in bankruptcy do not lead to the inclusion of that income in your taxable income. That’s why sometimes strategically, you’ll want to file a bankruptcy to discharge a significant debt rather than negotiate with a creditor to have them voluntarily release the debt.