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1099 C and Bankruptcy

February 3, 2012 by Steven A. Leahy

It’s tax time!  What do you do if you receive a 1099 C (Cancellation of Debt) from a creditor after you file bankruptcy.

When a creditor forgives (charges off) a debt, the IRS recognizes this as a “taxable event”   That means you must pay taxes on that amount, as if you received the forgiven debt as income.  With the mortgage foreclosure problems many have been facing, this could mean a tremendous increase in the amount of taxes that are due.  For example, I received a call today from a client who received a 1099 C in the amount of $40,000.00.  This increase in income could translate into thousands of dollars of additional income taxes.  Not a good alternative.

Take heart.  If you filed for protection under the bankruptcy code and received a discharge, the IRS has a process to exclude this type of income – so you don’t have to pay taxes on that forgiven debt.  You need to file Form 982 with your federal income tax return for a year a discharge of indebtedness is excluded from your income.  The purpose of Form 982:

“Generally, the amount by which you benefit from the discharge of indebtedness is included in your gross income. However, under certain circumstances described in section 108, you can exclude the amount of discharged indebtedness from your gross income. You must file Form 982 to report the exclusion and the reduction of certain tax attributes either dollar for dollar or 331/3cents per dollar.”

You must complete Form 982 and attach that form, along with the 1099 C , to your tax return.  Don’t just ignore this matter.  Often people receive these documents and simply discard them because they received a Discharge.  But the IRS is funny that way.  The IRS expects you to document and file all matters involving your income.

So, if you received a discharge  of your debt in  bankruptcy and you receive a 1099 C from a creditor, you should file the 1099 C along with IRS Form 982 along with your tax return, and protect yourself from additional taxes.

 

 

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