Does My Bankruptcy Discharge Have Tax Implications?

You may not know this, but most debts that are “forgiven,” or discharged, have tax implications. In other words, the forgiven debt looks like taxable income when it comes time to file your taxes. Does debt forgiven in Chapter 7 bankruptcy or Chapter 13 bankruptcy work the same way? In other words, do you have to pay taxes on the debt that has been discharged?
In short, the answer for debt discharged through bankruptcy is no—this forgiven debt is not considered taxable income by the IRS under federal law (26 U.S. Code Section 108). However, it is important to understand how this process works and to have a clear idea of when you will be responsible for taxes on debt that has been forgiven by a creditor.
Discharged Bankruptcy Debts Do Not Count as Income for the Purposes of Your Taxes
After you file for bankruptcy and receive a discharge of your debts, you might be wondering whether the forgiven debt counts as income when it is time to file your taxes in April. In many cases, debtors may even receive a Form 1099 from each creditor to whom debts previously were owed and that were discharged through your bankruptcy case.
What is a Form 1099? Generally speaking, 1099s are issued by businesses to individuals who receive $600 or more from them during the year, as an article in Forbes explains. Yet there are many different kinds of 1099s, and many of them are issued for amounts much lower than $600. For instance, you could receive a:
  • 1099-INT that specifies the amount of interest earned (such as in a savings account);
  • 1099-DIV that shows dividends for the year;
  • 1099-G that shows what you received in state and local tax refunds or in unemployment
  • 1099-R for any payouts from an IRA;
  • 1099-B that provides information about broker transactions;
  • 1099-S that specifies income from real estate transactions;
  • 1099-MISC, which simply stands for “miscellaneous”; and
  • 1099-C, which provides information on cancelled debt.
Why Did I Receive a 1099-C if I do Not Have to Report the Canceled Debt to the IRS?
Typically, debtors who file for personal bankruptcy in Oak Park or elsewhere in Illinois will receive a 1099-C from each creditor after debt is forgiven through bankruptcy. However, not every creditor will send one of these forms, so if you do not receive one, it does not mean that something is wrong. What you do need to know, however, is that unless you are receiving a 1099-C as a result of a bankruptcy discharge, the amount listed on that Form 1099 must be included in your taxable income for the year when you file for taxes. Canceled debt as a result of bankruptcy, however, does not have to be included.
Why did you even receive a 1099-C if you do not have to report the canceled debt as income to the IRS? In short, companies tend to issue a 1099-C form once they have written off a debt (as happens in bankruptcy). The same form gets used whether the creditor forgave your debt for another reason (such as a debt settlement reached) or following a bankruptcy discharge.
Contact a Chicago Bankruptcy Attorney
Taxes and bankruptcy can be confusing. If you need help, a Chicago bankruptcy lawyer can assist you. Contact the Emerson Law Firm today.
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