Bankruptcy and Cancellation of Debt – 1099c

Bankruptcy and 1099c Forms

Taxes - Illustration

With tax season just about behind us, many of our clients have questions regarding a 1099c “Cancellation of Debt” form they received.

A hidden burden of settled debt, whether on your own or through Debt Consolidation programs, is this “cancellation of debt”; any balance the creditor forgave on your debt will be considered taxable income to the IRS. The timing of your bankruptcy filing can dictate how this matter gets corrected.

If a creditor sends you a 1099c Cancellation of Debt after your bankruptcy was already discharged, you can simply file with the IRS their Form 982 – which states the debt was discharged in bankruptcy.

More challenging is if the 1099c was filed before your bankruptcy was filed, this is now taxable income which is non-dischargeable in a bankruptcy. Unfortunately, you will have to work with the IRS to show that you were insolvent (lacking finances) to pay for this debt and therefore should not be taxable income. While the IRS can be skeptical of this claim, the filing of a bankruptcy quickly after receiving the 1099c can bolster your position with the IRS.

The 1099c may extend beyond just your credit card debt. You can also face this tax liability when finalizing loan modifications on your mortgage – after all, most loan modifications will forgive a portion of your principal balance. This balance forgiveness may not come for thirty years, but the tax consequence still remains.

It is important to work with both our bankruptcy attorneys and your tax preparers when managing these 1099c situations.

Please contact our Westchester Bankruptcy Attorneys today at (914) 864-2465 or (845) 628-4301 to discuss which option is right for you. Our Westchester lawyers will work with you to manage your debt and help you understand your rights under the bankruptcy code.

photo by: DonkeyHotey