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
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.