As April 15 approaches, many people are receiving forms 1099 C from their banks. It’s one last parting shot after bankruptcy and foreclosure. It’s causing panic throughout the nation. Why? My friend Dan Press wrote a nice article about this a few months ago. But now that tax time is approaching, it is not a bad idea to mention a few cogent points.
How can it be that you have “made money” and have to pay income tax even though you just filed bankruptcy?
That’s because from the bank’s standpoint, it forgave debt to you. The bank didn’t want to. You made them do so when you filed your bankruptcy case. But since you don’t owe them money any more, and they can write off their loss, the Internal Revenue Service would ordinarily treat the bank’s loss as your gain.
Fortunately, you almost certainly won’t owe any taxes on account of the 1099C. You’ll have to point your accountant in the right direction since far too many have no idea about this topic.
Here’s what you need to know.
- Section 108 of the Internal Revenue Code protects you
- Your accountant will have to fill out a form IRS 982 along with your income tax return. Make sure your accountant looks at the February 2011 revision.
- Information is available in 2009-37, 2009-36 I.R.B. 309 available with IRS Publication 908.
- Cancellation of debt in connection with your residence should be excluded from income until 2012.
At Bankruptcy Law Network, we are bankruptcy attorneys and not tax attorneys. But we have to know and understand tax consequences of bankruptcy and we want you to understand them too. So now you have the information you need to give to your accountants and I’m confident that you’ll have very little difficulty with this seemingly challenging problem.
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Last modified: October 22, 2012