Do I Have to Pay Taxes on This? 1099-C's After Bankruptcy

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.