Generally, no. Unlike debt settlement, where consumers frequently have to pay income taxes on the forgiven portion of the amount owed prior to the settlement agreement, debts discharged in bankruptcy usually result in no adverse tax consequences for a consumer.
A 1099-C form is sent to taxpayers by a financial institution when it has cancelled or written off a debt exceeding $600. Unless an exception applies, the Internal Revenue Service counts the written off debt as taxable income. When a consumer settles a debt with a credit card company, frequently they will be required to pay tax on the forgiven portion of their credit card debt. Likewise, after a foreclosure or repossession, a consumer may incur tax liability if the creditor “forgives” the deficiency balance on their mortgage or car loan.
Does Form 982 apply to the 1099-C you received?
The Bankruptcy Exception
As an Asheville bankruptcy lawyer, I counsel clients on avoiding liability after a 1099-C has been issued by a creditor. Debts discharged in bankruptcy can generally be excluded from income by filing Form 982 with a consumer’s tax return. By doing so, a consumer avoids having to pay income tax on their debts discharged in bankruptcy (including mortgage and car loan deficiencies).
Other non-bankruptcy exceptions apply, and are explained in more detail in the instructions to Form 982 and IRS Publication 4681.
Have you received a 1099-C? If so, I’d be happy to answer your questions during a free, initial bankruptcy consultation.
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