If you receive a 1099 from a creditor after you file bankruptcy, IRS Form 982 will help you out. Forgiven debt is considered income to a borrower, since it is money that (theoretically) was given to the borrower but not returned. If someone files for bankruptcy and the debt was included and discharged, it should not be taxed.
IRS Form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)” advises the Internal Revenue Service that the debt that was included in a bankruptcy.
See also: Tax Time & the Discharge of Debt by Cathy Moran, and Settlements, DMPs and Form 982, Part 3 by Gene Melchionne
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Last modified: October 22, 2012