1099 and BK

[Kingxray]

I recently read a thread that concerned me and will discuss it with my lawyer on Monday but was wondering if I could get some clarification here.

I read that creditor's can send out 1099's for discharged debt, as they claim it as an expense. Is this true? I can't imagine claiming that much income. For many their discharged debt is more than their yearly income. I also read in the same thread that a person can get around this by claiming they were insolvent. Is there a separate schedule to file to claim insolvency? If all this is true, do we receive the 1099 after discharge or closing?

Just curious. It kinda freaked me out when I read it.

[JoeBankrupt33]

You should not get any 1099's, but it does happen.

Cancelled debts are not income when they are discharged in BK. If you do get any 1099-C forms for the debt, then you need to fill out IRS form 982. Mark box 1a and put the amounts from the 1099 forms in line 2. DO NOT put the debt amount in form 1040 line 21, where a cancelled debt would normally go.

As pointed out by Flamingo in a very similar post, none of your bankruptcy expenses are tax deductible, including attorney fees.

[ToughTimes]

I haven't seen any 1099s on my debt discharged 11-20-09 yet, but the month's not over, then, either.

If a 1099 is received on debt discharged in bankruptcy, IRS Form 982 has a nice box to check indicating the debt was discharged in a title 11 proceeding. My understanding is that doing this excludes the 1099 amount from one's taxable income.

IRS Publication 908 (on Bankruptcy) indicates the discharge due to title 11 has priority over other possible reasons for the 1099 amount to be excluded (including insolvency). This information is on page 24 of the March 2009 issue of that Publication.

Caution: Don't ignore any 1099s received. IRS gets a copy too, and they must be accounted for in one way or another when filing one's taxes, even if they don't result in any tax liability.

IMO, the exclusion from income for tax purposes of debt discharged in bankruptcy is one of the more powerful arguments for making the business decision to file a bankruptcy.

Disclaimer: I am not a tax professional. This is what I get from what I read in IRS Publications, Instructions and Forms. You may want to consult a tax professional for information specific to your situation.

[Justpoor]

Could you get a 1099 if you didn't file Bk yet? None of my credit cards are calling anymore. I was kinda hoping they gave up but I certainly don't want a 1099.

[CCsAreEvil]

Advanta sent me a 1099-C for the $3k I had owed. But there's a box on the 1009 that is checked for BK. So, I guess I'll be filling out a 982. I just hope no more 1099-Cs arrive. It just seems like extra crap to deal with.

[aces67]

My mom got some 1099's but she did not file BK she just didn't pay her debts so they wrote them off.

[Justpoor]

Aces, that's what I'm worried about. Capital One gave up fast. What if I get a 1099 for $15k? OMG!

[Kingxray]

You should not get any 1099's, but it does happen.

Cancelled debts are not income when they are discharged in BK. If you do get any 1099-C forms for the debt, then you need to fill out IRS form 982. Mark box 1a and put the amounts from the 1099 forms in line 2. DO NOT put the debt amount in form 1040 line 21, where a cancelled debt would normally go.

As pointed out by Flamingo in a very similar post, none of your bankruptcy expenses are tax deductible, including attorney fees.

Thanks much. That clears things up!

[Justpoor]

But I don't plan on filing BK until the end of 2010? If I get a 1099 for 2009 I think I will have to laim it as income.