A common question I receive around this time of year from
bankruptcy clients involves the receipt of a 1099-C from a creditor that was
discharged in their bankruptcy. This can be a pretty stressful piece of mail to
receive, especially as that client has already gone through the bankruptcy
process to wipe their slate clean only to face the prospect of an obligation to
the IRS.
Generally speaking, a 1099-C is a tax form sent to you from
a creditor that forgave debt of more than $600.00 to you in that taxable year.
That creditor (and you) are required to report that information and income to
the IRS. For individuals that have discharged that debt in bankruptcy, there
typically is no tax liability for this amount. That does not
mean, however, that you can just ignore the 1099-C.
What should you do with a 1099-C for debt that was included
in bankruptcy? In addition to filing your form 1040 to the IRS, you also need
to attach Form 982 to your tax return. This form notifies the IRS that you are
not adding the cancelled debt from the 1099-C to your gross income on your tax
turn because of the bankruptcy filing.
If you receive a 1099-C for debt that was secured by
property (i.e. a car loan or mortgage) the issue becomes a little more complex.
Yes, more likely than not you can exclude the forgiven debt from your gross
income. The IRS, however, still will treat the cancelled debt if the house is
foreclosed on, as though you sold the house. In other words, the IRS will want
to know if there was a gain or loss on the property. Generally speaking, a
taxable gain happens when you own property and that property sells for more
than you purchased it for or more than your tax basis. This can result in
having to pay taxes to the IRS.
Going through bankruptcy can be a difficult and frustrating
experience. The benefits of a successful bankruptcy, however, can be
significant. Don’t let an errant 1099-C hamper your bankruptcy discharge and
put you right back into debt.
If you receive a 1099-C for a debt included in your
bankruptcy, contact us for a free consultation on the possible impact that
document may have on your income tax returns.
