IRS Form 1099-C: Discharged Debt is NOT Income

If you settle a debt for a certain amount of money, the amount you don’t have to pay is “forgiven.”  Using a really simple example, if you have a $10,000 debt, and you settle it for $5,000, the creditor has forgiven the remaining $5,000.

Creditors are known to file IRS Form 1099-C on that forgiven debt.  As I’ve mentioned here when discussing debt settlement, that forgiven amount can be considered income.  Tax liability on that amount is something to be considered in determining the affordability of a debt settlement.

If debts are discharged in bankruptcy, is that considered income?  No.

But if that’s the case, why am I hearing from reliable sources that debtors all over the country are receiving IRS Form 1099-Cs from former creditors?  What’s going on?  And what can YOU do about it?

It’s wise that you not ignore it.  Talk to your tax professional about filing Form 982.  I have seen that it can take up to a few years for the IRS to determine that you under reported your income because you did not include income from a 1099-C.  This form will report the essential facts to the IRS which will show that you are not responsible for the taxes on this “income.”

If you filed bankruptcy and received a Form 1099-C from a creditor, speak to your bankruptcy attorney.  If you did not have a bankruptcy attorney – or if you want a second opinion from another bankruptcy attorney – find lawyer near you by going over here, to the National Association of Consumer Bankruptcy Attorneys.

I cannot put my finger on it yet, but something about this smells wrong.  I’m not sure it’s a violation of the discharge injunction, but I do know that debtors will find it unsettling – even moreso if they receive inquiry from the IRS next year, or the year after requesting an explanation as to what might be perceived as under-reported income.

Since it’s tax time, it’s important that I at least sound the alarm that something may not be right with creditors issuing IRS form 1099-Cs.  If you’re in chapter 13 or if you have received a discharge, make sure you’re not getting a 1099-C that you do not deserve, and if you do be proactive to avoid problems down the road.

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3 Responses to “IRS Form 1099-C: Discharged Debt is NOT Income”

  1. Gt says:

    I am looking for an answer too and that’s when I saw your article here.

    I have the same question, What can we do about these 1099-Cs.

    I called the Wachovia, and they only tell us what they were trained to say. “Consult a Tax Professional.” I called my Bankruptcy Lawyer’s Office and they say, the Creditors are not supposed to send us 1099-C after our Chapter 7 discharge. And like you said, they’ve also seen these 1099-C now being sent by the Creditors but they are not supposed to be taxable. And they advise me to seek a Tax Professionals help.

    Now I don’t want to hire another Lawyer or an Accountant and pay more fees again. We haven’t recovered financially from all these legal fees yet. BTW we were discharged in February 2010, case closed.

    Our case thouhg is very much different from most of the 1099-C’s issued by the banks. And like you I smell something very very wrong. We’ve got to be proactive like you said.

    When we filed Bankruptcy, we excluded our real estate property. In other words, we wanted to keep the property so we continued to pay the monthly mortgage…even until now (no delinquency). Just a few days ago, we received this 1099-C reported to IRS of course as a “CANCELLATION OF DEBT” in the amount of the entire loan balance of $364,000.00. The #6 box was checked meaning its for BANKRUPTCY (discharge I guess).

    This bothers me a lot. In the first place, THERE IS NO CANCELLATION OF DEBT. We did not walk away from the property or from the loan obligation, we did not have a shortsale, no loan modification, no what so ever. We’ve been paying the monthly mortgage. Our balance is still $364,000. It would be nice I guess if they actual forgave the debt and now our property is free and clear. But I’m sure it’s not the case.
    These banks already received some bail-out money from our government, are we gonna let them do these to our citizens? Isn’t the amount in the 1099-C a tax write-off for the banks? Tax write-off for what? I’m confused.

    I hope I’ve explained our case and you understand what I’m worried about. Even if the Tax Professional can wipe out that 1099-C amount of $364,000…still it’s not right. It’s wrong. There was no CANCELLATION OF DEBT from them. Is there anything here I’m missing?
    What must we do? Who should I report this to? Thanks for reading.

  2. Bill McLeod says:

    You said you do not want to hire another lawyer or an accountant. But that is exactly what you need to do to get an accurate opinion that fits your particular situation. Don’t be penny-wise and pound foolish. Speak to an attorney or a tax professional about what you must do to protect yourself.

    Good luck,

    Bill McLeod

  3. Eric Pfahler says:

    I have the same situation with 2 1099-C s and of course the banks are again getting away with a better balance sheet and a better financial position which leads the executives to healthy bonus checks this coming year! (as we again fight to get back up from our miserable financial situations and bankruptcies).
    Mr. Mcleod is probably right about seeing an attorney and accountant.

    One quick thing you might try is argue your point when you call the bank and try to get to the supervisor because the first person will just give you a canned answer. I did this and they advised me they will look into my situation and contact me in 3-5 days.

    Good luck,
    Eric Pfahler

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