In the bankruptcy alphabet, F is for IRS Form 1099-C. What is that, you ask? Form 1099-C is for the cancellation of debt. When creditors such as banks, credit unions and mortgage companies write off or “settle” or cancel debts with individuals, they frequently report those write-offs to the IRS, provided that the amounts forgiven are more than $600.
Therefore, the creditor will send you a Form 1099-C and you will be required to report this as income on your tax return. If this sounds incredibly unfair and harsh, it is indeed. Fortunately though, there are some good ways to avoid having to ultimately pay the tax. But you should never ignore one of these Forms; you will simply have to do more work at tax return time.
The biggest exemption from having to pay income tax with a 1099-C is when you have included this debt in a bankruptcy case. In other words, if you have already discharged (wiped out) the debt in bankruptcy, then it’s no longer a legal debt.
So how does this work? Let’s say that you have a Discover Card account with a balance of $9,000. You choose to “settle” the account for $5,000. Discover will send you a Form 1099-C for $4,000 which is the difference between the balance and the amount you paid them.
We see these with credit card accounts, bank loans and mortgage deficiencies. As long as you have listed these debts on your bankruptcy schedules, then you simply have to file Form 982 along with your income tax return and the IRS will waive the amount shown on the 1099-C.
If you have questions, let me know and download my free Bankruptcy e-book while you’re at it.
Now here’s more from the Bankruptcy Alphabet from around the country:
F is for Failure and Fresh Starts from Philadelphia Suburban Bankruptcy Attorney, Chris Carr;
F is for Family Farmer & Fisherman from Omaha and Lincoln Nebraska Bankruptcy Attorney, Ryan Caldwell;
F is for Financial Fatigue by Cleveland Area Bankruptcy Attorney Bill Balena;
F is for First from Northern California Bankruptcy Attorney Cathy Moran;
F is for Forgiveness of Debt from Los Angeles Bankruptcy Attorney Mark Markus;
F is for Forms from Jacksonville Florida Bankruptcy Attorney J. Dinkins D. Grange;
F is for Fraud from Philadelphia Bankruptcy Attorney Kimberly Coleman;
F is for Fresh Start from Marin County Bankruptcy Attorney Catherine Eranthe and also Fresh Start from Metro Richmond Consumer and Bankruptcy Attorney Mitchell Goldstein and also Fresh Start from Chicago Bankruptcy Attorney Daniel J. Winter;
F is for Future Flow Agreements from New York Bankruptcy Attorney Jay Fleischman;
F is for Bankruptcy Attorney Fees from Michigan Bankruptcy Attorney Kurt O’Keefe and
F is for Filing Requirements from Miami Bankruptcy Attorney Dorota Trzeciecka.