Legal Question in Bankruptcy in New York

Re: 1099 a

Understanding the concept of debt forgiveness is important as that may trigger tax consequences. However, bankruptcy does not.

There are No Tax Consequences From Discharging Debts in Bankruptcy. When the forgiveness of debt occurs in a bankruptcy case, Internal Revenue Code section 108(a)(1)(A) specifically provides that it is not to be treated as income. Thus, discharge of a debt through a bankruptcy proceeding is excluded from gross income for tax purposes.

Creditors Sometimes Cause Problems by Issuing Form 1099-C. Even though the law is clear that discharged debts are not to be treated as taxable income, some creditors erroneously believe that they are required to send a bankruptcy debtor a form 1099-C when a debt is discharged in bankruptcy. Obviously this causes confusion to tax preparers who are often accustomed to including all income reflected in 1099 forms as income to the taxpayer.

What Should a Debtor do If Creditor Issues a 1099-C after Bankruptcy? If a credit card company issues a debtor an IRS form 1099-C after a debtor has received a bankruptcy discharge, the debtor has two options. The first would be to contact the creditor to advise them that the 1099-C was issued in error. However, since such creditors have no incentive to actively resolve this, the better option would be for the debtor to directly advise the IRS about the filing of the bankruptcy. The debtor can do this by writing a simple letter to the IRS supported by a photocopy of the bankruptcy discharge order and the schedule containing the specific debt. Alternatively, the debtor or his accountant can file an IRS form 982, which enables the debtor to point out to the IRS that the debt forgiveness (by virtue of the bankruptcy discharge) occurred in a bankruptcy proceeding and has no tax consequences. It is very easy now to go on line and obtain a PDF copy of IRS form 982 (or any other tax form).

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