Did you receive a 1099-C after your bankruptcy discharge? A creditor may have sent a 1099-C to you after they wrote-off your debt. If you had not filed bankruptcy, then you may have had to report the amount of forgiven debt on the 1099-C as gross income and pay taxes on the amount to the IRS. However, since you filed bankruptcy, generally there are no income tax consequences, but you will need to take appropriate action to handle the 1099-C.
The following information will help you understand why the 1099-C was sent, provide you with general information on excluding the canceled debt from your income, and cover specific tax issues that arise if the debt was secured to your property.
Why was I sent a 1099-C after my bankruptcy discharge?
A 1099-C is generated by a financial institution, such as a lender, after a qualifying event. A qualifying event occurs when the entity has written-off or canceled a debt in excess of $600. Cancelling the debt requires the bank to send you the 1099-C regardless of whether you received a discharge in bankruptcy. This means the 1099-C you received was likely generated appropriately, but does not mean that you must take it as actual income on your tax return. You will need to file the appropriate forms with the IRS to exclude the canceled debt as income on your 1040 tax return.
Note: Not all institutions send a 1099-C, so do not expect one for each debt you discharged. In addition, sometimes a 1099-C may be sent a few years after the bankruptcy discharge.
Excluding 1099-C Canceled Debt from Income after Bankruptcy
In addition to filing your 1040 with the IRS, you will need to attach a Form 982 to your federal income tax return. By filling out Form 982 for the IRS, you will be letting them know that you are not adding the canceled debt to your gross income on your tax return and that the debt is excluded from your income due to the filing of a bankruptcy.
The instructions for Form 982 as well as IRS Publication 4681 provide more detail on excluding canceled debt from your income.
See also: Debt Settlement FAQs
Other 1099 Issues with Secured Property
Secured property is property, such as your home or car, where the lender holds a security interest. Regardless of your ability to exclude the 1099-C debt from your income due to bankruptcy, there is another tax issue that arises with secured property. When your debt is secured by property and the property is repossessed or foreclosed in order to satisfy your debt, then the IRS treats that situation just like your property was sold.
This means the IRS will want to know if there was a gain or loss on your property. A taxable gain on your property happens when you own property and the property sells for more than you purchased or more than your tax basis. A taxable gain may result in increased taxes having to be paid to the IRS.
See also: Surprise, You Owe Taxes
What to Do If You Need Help Filing Taxes After Bankruptcy
Cohen and Cohen neither prepares tax returns nor files Form 982 for our Colorado bankruptcy clients. This webpage is for general information only and is not meant to constitute legal or tax advice appropriate for your situation. In addition, this information is subject to change and is not guaranteed accurate. The next step is to visit the IRS website or contact your CPA for the latest 1099-C tax information and for help with your specific tax situation.
If you or someone you know needs help understanding their bankruptcy options, making important legal decisions, or requires professional bankruptcy representation, then contact our experienced bankruptcy attorneys at Cohen and Cohen.
To schedule an initial consultation to review your case with a Colorado bankruptcy attorney at our convenient central Denver location, call 303-933-4529.
About the Author: Robertson Cohen
Rob Cohen is a Managing Partner of Cohen & Cohen, P.C., serving clients in Colorado and Wyoming. He’s a Chapter 7 Bankruptcy Panel Trustee, certified mediator, and has administered over 8,000 Chapter 7 bankruptcy estates.