Every year at tax time we get calls from our clients who say, “I just got a 1099C from a creditor for a loan that was discharged in my bankruptcy! What do I do now? Do I have to report it as taxable income to the IRS?”
When a creditor charges off a debt as uncollectible or has reached a settlement that releases the debtor from further obligations, he must report it to the Internal Revenue Service (IRS) as a business expense if the amount is more than $600.00. He will then send the debtor a 1099C by January 31st which the IRS considers as taxable income to the debtor. Usually, if the debtor has not filed for bankruptcy, he/she must report the discharged debt as taxable income on that tax year’s return even though he/she has not actually received the money.
However, if the debtor has filed for and/or been discharged from bankruptcy, the debtor should not incur any tax consequences for a discharged or settled debt. It is then the creditor’s responsibility to mark the “bankruptcy” box on the 1099C indicating to the IRS that the debtor has no tax liability for the discharged debt. If the creditor does not mark the bankruptcy box, the debtor can submit Form 982 with their income tax return which allows him/her to reduce his taxable income by the amount of the debt that has been discharged and thus releasing him from any income tax liability associated with the debt.
If your debts have been discharged in a bankruptcy proceeding and you receive a 1099C from a creditor you should immediately consult your experienced bankruptcy attorney who can advise you on how to file Form 982 with your income tax return.