The economy has seriously damaged the personal finances of millions of Americans, and some of them may be reminded of that situation this filing season as they consult with their tax preparer on Internal Revenue Service policies regarding bankruptcy.

According to the IRS, people who file for bankruptcy will find that their tax obligations will vary depending on the chapter under which they file.

Typically, people who have a debt cancelled, such as a credit card or mortgage balance, must report that forgiven amount to the IRS as income, which can result in unforeseen tax obligations in some cases. However, the IRS notes that debts cancelled as part of a bankruptcy proceeding are not seen as income under the tax code.

While the recession is widely seen as clearing up, people may be surprised to know how common bankruptcy filings have been in the past year.

The American Bankruptcy Institute recently highlighted data showing that in 2009, 1.47 million people filed for bankruptcy, marking a 32 percent increase over the figure recorded in 2008. During this same period, business bankruptcies also posted a substantial gain.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.