1099 C Bankruptcy
Many people that have had their debt discharged do not know that they are required to report and pay taxes on the amount forgiven to the IRS. What normally happens is that creditors or a financial institution send you a 1099-C form whether your debt was cancelled in a bankruptcy, or you never filed for bankruptcy. The 1099-C form is generated to report Cancellation of Debt Income to the IRS in situations where more than $600 is forgiven. An experienced and skilled bankruptcy lawyer can sit down with you and explain in detail what this form means and what its uses are.
When You Receive 1099-C Without Filing For Bankruptcy
If your debt was written off without you filing for bankruptcy and you received a 1099-C, you may need to report the amount forgiven to the IRS, and pay taxes on the amount. You should know that the creditor or the financial institution that wrote off your debt sends a copy of the 1099-C to the IRS. So, you should never ignore a 1099-C by failing to report your discharged debt to the IRS. Even if you did not receive the 1099-C after your debt was discharged, you still need to report the forgiven amount and pay taxes on it.
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Receiving 1099-C After Filing For Bankruptcy
When you receive a 1099-C for a debt discharge that you got after filing for bankruptcy, then you may not have to pay taxes on that forgiven debt. This is because debt cancelled in a bankruptcy is excluded from income. But you have to apply for exceptions before you use “debt cancelled in bankruptcy” exclusions. You do this by attaching a Form 982 to your federal income tax return, which is a form that lets the IRS know that you are not adding written off debt as income to your tax return. Your bankruptcy lawyer can show you how to fill this form and guide you on other steps you need to take.
What About Your Car or Home
If your secured property such as a car or home is repossessed or foreclosed to satisfy your debt, the IRS will treat that situation just like your property was sold. Your taxes may be increased if the property was sold for more than you purchased or more than your tax basis. A Chapter 13 or a Chapter 7 bankruptcy can protect your property from being repossessed.
Filing Taxes After Bankruptcy
Income tax debts cannot be discharged if you did not file a tax return or avoided your tax obligation even if you file for bankruptcy. A qualified CPA can help you identify your tax obligations after bankruptcy so that you can pay the IRS what you owe. Your CPA will not only help you file your taxes but will also give you important information on taxes after bankruptcy. If you need more information on what tax debts were discharged by bankruptcy, talk to an experienced bankruptcy attorney. Your lawyer can also represent when you are facing lawsuits for other debts you owe.