Can I discharge 1099-C debts in bankruptcy without reporting them as income?

Full question:

I have been holding off on bankruptcy of some time now. I have a couple judgments against me and now I have received two 1099-C from a credit card company. All my debts are credit card debts. If I file bankruptcy now can these 1099-C be taken care of or do I have to show them as income? Will they be wiped off the records if I show them as income on my taxes? With others waiting to sue, will this continue?

Answer:

If you receive a 1099-C form from a creditor, you must report the cancelled debt as income to the IRS, even though you haven't received any money. The amount in Box 2 of the 1099-C is what you need to report.

The IRS allows exceptions where you don't have to report cancelled debt as income. These include:

  1. Bankruptcy — the debt was discharged through bankruptcy.
  2. Insolvency — your total debts exceed your total assets when the debt was settled.
  3. Indebtedness due to qualified farm expenses.
  4. Indebtedness from certain real property business losses.
  5. Discharge of debt treated as a gift (very rare).

If you are insolvent, you can explain this to the IRS in one of two ways: by filling out IRS Form 982, or by attaching a letter to your tax return detailing your total debts and assets. You are considered insolvent if your liabilities exceed your assets. For example, if your liabilities are ten thousand dollars and your assets are six thousand dollars, you are insolvent by four thousand dollars. Use fair market value to assess your assets.

Generally, bankruptcy discharges debts but does not erase the requirement to report income unless the debt was discharged in bankruptcy. If the credit card debt was discharged, then the 1099-C income does not need to be reported.

This content is for informational purposes only and is not legal advice. Legal statutes mentioned reflect the law at the time the content was written and may no longer be current. Always verify the latest version of the law before relying on it.

FAQs

If you fail to report a 1099-C, the IRS may consider it tax evasion. This could lead to penalties, interest on unpaid taxes, and potential audits. It's crucial to report any cancelled debt as income unless you qualify for an exception, such as bankruptcy or insolvency. Not reporting can complicate your tax situation and lead to further legal issues.