What Happens When I Receive a 1099-C After I File Bankruptcy?

By Ryan C. Wood

Most of you have received or will be receiving all the important tax documents like your W-2s and 1099s in the mail at this time so that you can start preparing your tax returns. What happens if you receive a 1099-C in the mail and you have already filed bankruptcy? There is no need to panic. This article will provide you with information on whether or not you need to include your cancelled debt as “income” for your tax returns.

Companies send out 1099-Cs to report cancelled debt to the Internal Revenue Service (“IRS”) if the amount of debt cancelled is over $600. The IRS will count the cancelled debt as income that you need to report on your tax return. Why do you have to include cancelled debt as income? The theory behind this is that since you did not have to pay the debt that was cancelled or forgiven that is considered income to you. For example, if you owed $20,000 on your credit card but could not repay it and the credit card company forgives or cancels the debt, you essentially received the benefit of the $20,000 without having to repay it and nonpayment of the debt is therefore considered income to you.

There are several exceptions to counting cancelled debt as income. One of the exceptions is if your underlying debt has been discharged in bankruptcy then the debt that has been discharged is not considered income and therefore not taxable. Therefore you do not have to worry about having to repay the debt that was wiped out in your bankruptcy case. Your creditors should receive notice of the discharge of your debt and not send you a 1099, but some creditors may still send out a 1099 anyway. If that is the case you do not need to worry. You should complete IRS Form 982 and attach it to your tax return to provide notice to the IRS that the debt was discharged in bankruptcy and the discharged amount will not be included as income. Most bankruptcy lawyers may not know about IRS Form 982, so it is a good idea to discuss tax consequences with a CPA.

What happens if you receive a 1099-C before you file for bankruptcy? Does that mean your debt was cancelled before you filed for bankruptcy and therefore not discharged in bankruptcy? The answer depends on which state you live in. Some states believe that the mere filing of the 1099-C does not cancel a debt. The 1099-C only serves to provide information to the IRS and an accounting measure for their internal books but it does not mean the creditor cannot still sue or otherwise collect on this debt. See In re Zilka, 407 B.R. 684. If you retain a bankruptcy attorney and file for bankruptcy after receiving the 1099-C the underlying debt is still considered to have been discharged in your bankruptcy case and therefore not considered “income.” If the 1099-C is considered a true cancellation of debt and it was issued prior to the filing of your bankruptcy case you may still be able to have the income excluded from your tax returns if you were insolvent at the time the debt was cancelled. This means that your debts exceeded your assets at the time the debt was cancelled or forgiven. Taxes are a complex topic. You should consult with a CPA or bankruptcy attorney if you have questions regarding this issue.