You do not owe taxes on any debts discharged in bankruptcy.
WHY DO PEOPLE RECEIVE FORM 1099-C?
American tax law takes the position that if a creditor forgives a debt, then the debtor has made money.
Think about it this way:
- If you have a $100,000 mortgage, and then the bank forgives the mortgage, you are $100,000 richer, right?
The IRS wants its cut of this $100,000, so they require the bank that forgave the debt to issue you a 1099-C form.
The 1099-C form tells the IRS that you made $100,000 from forgiven debt, and that the IRS should expect you to pay taxes on that $100,000.
If that seems unfair, keep reading.
- If the debt is forgiven in bankruptcy, then you don’t have to pay taxes on that debt
However, there is a special exclusion in the Internal Revenue Code (Source, Cornell Law) which says any debt forgiven because of a bankruptcy discharge does not count as income.
Whenever a lender forgives a debt for any reason they are required to issue a 1099-C.
- Don’t panic if you get a form 1099-C in the mail for debts included in your bankruptcy, you won’t have to pay taxes on it
WHAT DO I DO WITH THE 1099-C?
Please note: I am not an accountant or tax attorney, and this article does not constitute tax or accounting advice.
That said, there is a form that you should file with your taxes to let the IRS know that you don’t owe any taxes because of the 1099-C.
If you filed for bankruptcy and discharged the debt on the 1099-C in bankruptcy, then you should check box 1a.
This box says “Discharge of indebtedness in a title 11 case”
Title 11 is the bankruptcy code.
I don’t know why the IRS didn’t choose to use more obvious words in their forms.
This would be much easier to understand if it said “Discharge of indebtedness in a bankruptcy case.”
WHAT TO DO NEXT
If you’ve filed for bankruptcy received form 1099-C and are struggling to fill it it in , then why not not speak to us now at 612.824.4357?
We’ll give you all the help and advice you need.
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