Effect of receiving a 1099-C for a Debt Discharged in Bankruptcy
When a creditor forgives a debt, either through a write off outside a bankruptcy or because a discharge of the debt through the bankruptcy, the creditor is required by the IRS to file a 1099-C. If you receive a 1099-C and have not filed for bankruptcy protection, you may have to report the amount forgiven as part of your income and pay taxes.
If you have received a discharge through a bankruptcy and receive a 1099-C, you may be concerned about owing a tax liability or if this is a violation of the bankruptcy discharge. Creditors are supposed to file 1099-Cs if there is an event of debt forgiveness – regardless if the debt is not collectible because of a bankruptcy discharge. Because the creditor does not benefit from any taxable debt forgiveness, it is considered a collection action or a violation of the bankruptcy discharge.
Typically, if the debt forgiveness arose because you were insolvent, it is not a taxable event. If the 1099-C relates to debts discharged in your bankruptcy, there is a presumption you were insolvent when the debt was created. As such, it is generally not taxable to you.
However, most bankruptcy attorneys are not tax professionals who file tax returns on behalf of their clients. Therefore, if you receive a 1099-C, it is important to talk with your tax professional. If you have receive a bankruptcy discharge in recent years, it is equally important to let your tax professional know so the proper treatment of the 1099-C can be selected.
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