It is that time of year when my phone starts ringing from former bankruptcy clients who are now contacting me in a panic because they have received intimidating tax forms in the mail from their former creditors. Specifically, IRS Form 1099-C.
1099-C is sometimes sent by a lender when it has written-off (cancelled) a debt in excess of $600. If you have not filed bankruptcy, you may be required to report the amount forgiven as gross income and pay taxes on it. However, if you have received a bankruptcy discharge, you will not be required to pay taxes on it if you take the appropriate steps.
Again, do not panic! It simply requires that you provide the IRS with the correct information on a supplemental tax form (Form 982) that you will submit with your regular Form 1040 return. Debt discharged in bankruptcy is not considered taxable income for cancellation of debt purposes! It is an exception. The tax code provides other exceptions even if you did not receive a bankruptcy discharge. You should seek the advice of a qualified tax professional for advice specific to your circumstances.
Please note that if the creditor canceled the debt before you filed bankruptcy, it may be deemed taxable income because it was not a debt at the time of the bankruptcy filing, and therefore, not discharged. Again, another exception may apply to your situation and you should seek the advice of a qualified tax professional.
PLEASE make sure that your tax preparer is aware of the receipt of the 1099-C AND that you received a bankruptcy discharge. The tax preparer, similar to your bankruptcy attorney, cannot help you unless he or she has all of the important facts about your situation.
Lastly, Vivian Law Firm PLC is always glad to hear back from former clients that their financial situation has improved after discharge! If you have read this article and decide not to call because you are now calm knowing 1099-C is an easy fix, call anyway to let us know how you are doing! Vivian Law Firm PLC located in Plymouth, Michigan can be reached at (734) 446-0340.