Why am I receiving a 1099 on a debt that was included in my bankruptcy?

Posted on Feb 14, 2013 By Mary Conner Pool

The IRS requires lenders to report cancelled debts.  When a lender cancels a debt, the amount cancelled is deemed income to the individual taxpayer who received the benefit of the cancellation.  Thus, an individual taxpayer would have to pay taxes on the income (amount of the cancelled debt). This is NOT TRUE, however, if the individual discharged the debt in bankruptcy.

There are two different types of 1099 forms that you may receive after filing for bankruptcy, they are:

1099-A:

This form is used to report the Acquisition or Abandonment of Secured Property.  The majority of time this is sent to you after you surrender your home or the lender foreclosed upon your home.  A 1099-A form is sent reflecting information needed to determine your gain or loss on the property from the foreclosure or abandonment.

If you have filed for bankruptcy and the property was your personal residence, then there is no capital gains tax relating to the foreclosure or surrender.  NOTE:  If the property was investment property, you may have to deal with a capital gains tax and should talk to your tax preparer.

1099-C:

This form is used to report a Cancellation of Debt.  A lender will send this to you when it has cancelled your debt and the amount of debt cancelled is deemed by the IRS to be income to you. Once again, this is NOT TRUE if you have discharged the debt in bankruptcy.   You DO NOT have to pay taxes on a debt discharged in bankruptcy.

When an individual taxpayer receives a 1099 after receiving a discharge, they should make sure their tax preparer is aware that they filed bankruptcy and complete IRS Form 982 to avoid having to pay income on the cancelled debt.  It is essential that you do not ignore the 1099 forms.

If you are an individual taxpayer living in Alabama, Mississippi or Tennessee and have debts you can no longer afford to pay, contact your local Bond & Botes office to find out how you may avoid having to pay taxes on debts that are cancelled.  You deserve a fresh start!