Most of you have received or will be receiving all the important tax documents like your W-2s and 1099s in the mail at this time of year so that you can start preparing your 2014 tax returns yourself or have a professional prepare them for you.
So what happens if you receive a 1099-C in the mail and you have already filed for bankruptcy protection?
There is no need to panic as through this blog I will provide you with the information to include with your tax return to take care of this issue.
Companies send out 1099-Cs to report cancelled debt to the Internal Revenue Service (IRS) if the amount of debt cancelled is over $600. The IRS will count the cancelled debt as income that you need to report on your tax return.
Paying Taxes on Cancelled Debts
You might ask, why do I have to include cancelled debt as income? Well, it seems the IRS thinks of every way possible to get tax money out of you and their theory behind this is that since you did not have to pay the debt that was cancelled or forgiven, then it should be considered income to you. I personally call it phantom income, because you never actually see the income.
For example, if you owed $20,000 on your credit card but could not repay it and the credit card company forgives or cancels the debt, you essentially received the benefit of the $20,000 without having to repay it and nonpayment of the debt is therefore considered income to you.
There are exceptions to having to count cancelled debt as income and fortunately one exception is if your underlying debt has been discharged in bankruptcy. If that is the case, then the debt that has been discharged is not considered income and therefore not taxable.
Therefore, you do not have to worry about having to repay the debt that was wiped out in your bankruptcy case. Your creditors should receive notice of the discharge of your debt and not send you a 1099-C, but some creditors may still ignore the notices and send out a 1099-C anyway.
But like I alluded to earlier, if that is the case you do not need to worry. You simply need to complete IRS Form 982, and attach it to your tax return to provide notice to the IRS that the debt was discharged in bankruptcy and the discharged amount will not be included as income.
If you have received a 1099-C and you have yet to file for bankruptcy protection, please call one of our conveniently located offices to set up a private consultation with one of our experienced attorneys as soon as possible. Bankruptcy is a complex area of law especially when taxes are involved and at Bond & Botes, our affiliated offices offer free initial consultations. We will analyze your situation and help you to make the best decision possible to help you eliminate phantom income debt once and for all and help you keep your hard earned money and property.