IRS Form 1099-C After Bankruptcy
A 1099 is a tax reporting form that you may receive if you earn certain types of income. Typically, you will receive a 1099 if you are an independent contractor rather than an employee. A less common use of a 1099 is to report the amount of a forgiven or canceled debt, which the IRS treats as income.
Why Was the 1099-C Sent
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 cancelled 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 cancelled debt as income on your 1040 tax return.
On line 6 of Form 1099-C there is a box that may be checked if your debt cancellation was due to bankruptcy. This is because debt forgiven in a bankruptcy discharge is not taxable under federal law. Although most creditors that were included in your bankruptcy will not send a 1099-C at all, some may send one showing that the amount of the debt was included in bankruptcy.
Excluding 1099-C Canceled Debt from Income after Bankruptcy
In addition to filing your 1040 with the IRS you will need to attach a IRS Form 982 to your federal income tax return. By filing-out IRS Form 982 for the IRS you will be letting them know that you are not adding the cancelled 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 cancelled debt from your income.
Even if you did not file bankruptcy at the time your creditor wrote off your debt, you may be able to avoid taxation on at least a portion of the debt. If you were legally insolvent at the time the debt was canceled, you can exclude the amount of your insolvency from your income. According to the IRS, you are legally insolvent to the extent that your debts were greater than the fair market value of all of your assets at the time of the debt cancellation. For example, if you owe $20,000 in credit card debt and only have $2,000 in assets, you are insolvent to the extent of $18,000. You can enter this amount on line 2 of Form 982 after checking the insolvency box on line 1b.
Bankruptcy Is Not the End
I know what you are experiencing. I have helped erase debt through Chapter 7, and effectively restructured debts through Chapter 13 bankruptcy. I also negotiate with lenders and collection agencies on your behalf and counsel on student loan debt. The path to success starts with a phone call.
Call me for a free consultation at (215) 551-7109.