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1099C - Cancellation of Debt After Bankruptcy

Posted by Jeffrey Foster | Feb 28, 2013 | 0 Comments

This year I have received a fair number of inquiries regarding the issuance of (IRS) Form 1099C to individuals who have discharged the debt in bankruptcy.  A 1099C can be issued by a creditor if it forgives debt.  The IRS treats the forgiven debt like taxable income.  In the absence of a bankruptcy filing, such forgiven debt may be taxable.  However, a bankruptcy discharge is an exception to the otherwise taxable cancellation of debt.

Section 108 of the tax code sets forth the relevant exception to imposing income tax upon debt discharged in a bankruptcy proceeding:

(a) Exclusion from gross income

(1) In general
Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if—
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm indebtedness,
(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or
(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2014.

In most cases, it is a mortgage creditor who issues the 1099C following foreclosure.  If you receive a 1099C, I recommend you consult with a CPA or tax lawyer experienced with the effects of a bankruptcy discharge on cancelled debt.

Because your CPA may not be familiar with the treatment of debt discharged in a bankruptcy proceeding, you may wish to bring the above-referenced code section to the attention of your CPA when completing your tax filings. 

About the Author

Jeffrey Foster

Attorney Jeffrey Foster is the founding partner of Foster Law Offices. An accomplished litigation and transaction attorney, Jeff proudly represents Washington individuals and businesses in legal matters Personal Injury, Bankruptcy, Real Estate and Civil Litigation.

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With offices on the Big Island of Hawaii and Washington State, Foster Law Offices represents clients in personal injury and real estate matters. We are also available for representation in a wide range of civil litigation cases.

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