1099-c

[dakota112]

Filed Ch 7 one week ago, and today I get a 1099-C in the mail from the bank that 163 K was forgiven when my home foreclosed. Will the IRS want anything on this from me? There is no way in hell I could pay them in this life if they did but I'm just curious.

[ToughTimes]

You will want to ask your BK attorney about this, as well as your tax professional. If I understand correctly, you are describing the foreclosure as having taken place prior to having filed your BK.

What is certain is that IRS will definitely want to see a Form 982 explaining the Reduction of Tax Attributes Due to Discharge of Indebtedness relative to the 1099-C unless you are paying tax on the 1099-C amount. (Ya gotta either pay the taxes or tell 'em why you aren't obliged to pay the taxes. Form 982 tells them why you're not obliged.)

[dakota112]

I would imagine I'll be getting a slew of these 1099's from the credit card companies also now that I have filed and they can charge this off their books. I will have to ask my accountant, but I can't see how freshly bankrupt folks can pay the IRS a third of this debt as otherwise one would really never get a fresh start in life as the constitution provides for. One hell of a vicious circle and imagine the fines the IRS would levy as few could pay this debt.

[ToughTimes]

You may want to check out the Mortgage Forgiveness Act of 2007 (still in effect, thru 2012 as nearly as I can tell). Presuming the foreclosed property was your primary residence, and that the amount forgiven was used to buy, build, or substantially improve the property, the 1099-C amount should be excluded from your gross taxable income. Again, I am presuming the foreclosure took place prior to your filing bankruptcy.

Debt discharged in bankruptcy is generally excluded from gross income as well according to IRS Pub 908 "Bankruptcy Tax Guide". I have not yet received any 1099-Cs as a result of our discharge of CC debts, but the month is young yet. From what I've read on this forum, some CC companies seem prone to issue 1099-Cs, others not.

Speaking in broad, general terms, unless you have something really special going on, you're not likely to actually owe tax on your 1099-Cs from what you've related here. What is vital is that IRS has copies of the 1099-Cs as well and you absolutely must account for them in your tax filing, whether or not you owe any tax on them.

Your tax professional should not find any of this confusing. If s/he does, you may want to find another.

[dakota112]

Thanks for your input. My concern is that the house was foreclosed and sold by the bank 4 months before I filed but that the mortgage was refinance 5 years ago when property values were higher so I used the equity for all sorts of stuff including ironically paying taxes and not necessarily to improve the house. All I am saying is I can't be the only one in the USA in this predicament to have had a home foreclose and debt forgiven on the home by the bank and in which this debt was not used to improve the property. I imagine this is how half of america lived , using their homes as a piggy bank. Was't smart in hindsight I know.

[ToughTimes]

You may enjoy visiting the IRS website and searching on Mortgage Forgiveness Debt Relief Act. That way you can read information directly from them.

Again, I am not a tax professional. To me, it appears the IRS site is saying that you can exclude the forgiven mortgage amount that was used to buy, build, or substantially improve your primary residence. The rest, if you qualify as insolvent at the time, can be excluded on that line of the 982.

Frankly, when I try to figure insolvency, my brain starts to hurt and I start to consider finding a tax professional of my own. So I can only recommend that you consider doing the same: find someone familiar with this aspect of income tax reporting and hire 'em.

[DebtHater]

I would imagine I'll be getting a slew of these 1099's from the credit card companies also now that I have filed and they can charge this off their books. I will have to ask my accountant, but I can't see how freshly bankrupt folks can pay the IRS a third of this debt as otherwise one would really never get a fresh start in life as the constitution provides for. One hell of a vicious circle and imagine the fines the IRS would levy as few could pay this debt.

Generally speaking, you only get a 1099c from a credit card company if you settle a debt for less than is owed with the original creditor.

If the OC written off the debt and sold it to a CA, or if the debt was discharged through BK, then (in most cases) you will not be responsible for the taxes.

[dakota112]

My atty toldme to stop worrying about but then she deferred me to my accountant who is a great guy but is busy as heck right now and he told me I'll be ok but now I still worry because this whole process is foreign to me and if I am going to go through a CH7 , I would hope this would all be behind me after the discharge.