How will filing bankruptcy affect your tax returns?

If all of the debt is cancelled, or forgiven, you may still receive a 1099-C for Cancellation of Debt from the lenders who cancelled the debt. These can sometimes take years to reach you, so it would be a good idea to check with all of the lenders to find out if they will be issuing one to you. The main reason this is so critical is the IRS receives a copy of every 1099-C that is issued. If you do not report the amount(s) from the 1099-C, you will probably get a letter from the IRS telling you that you owe additional taxes. They consider cancelled debt as income that is taxable.

There is Form 982 that can essentially negate foreclosure debt, as well as other forms of cancelled debt, so no taxes are paid on it. With personal debt ie: credit cards, auto loans, etc., there is a worksheet that can be filed that tallys your assets and liabilities at the time of the bankruptcy. For instance, if you had cancelled debt of $10,000 and you had $20,000 worth of assets, but $30,000 in liabilities, you would have been Insolvent by $10,000. You can eliminate paying taxes on cancelled debt to the extent of your insolvency. In the above example, you would not have to include the $10,000 cancelled debt as income because you were insolvent by $10,000.
Doesn't change any of your legal obligations (other than the debts at the court), like filing taxes, or what is due.