After a Chapter 7 or Chapter 13 bankruptcy, you may receive a Form 1099C in the mail at tax time. This income must be reported on your tax return but there are some things you need to understand about this form and how the income reported on that form impacts your tax return.
Chapter 7 Bankruptcy: Debt Discharge
When you file Chapter 7, your bankruptcy attorney in Marietta will advise you that all of your credit card debts and medical debts as well as any other dischargeable debts will be considered satisfied once your bankruptcy is discharged. This means that creditors no longer have the option to sue you to collect that debt and they can no longer pursue debt collection activities. However, this also means the creditor is allowed to write the debt off on their taxes. While not all creditors will do so, many will issue debtors who have completed a Chapter 7 bankruptcy a Form 1099C reporting the amount of debt that was discharged. Before you file your taxes, speak with a qualified tax preparer because there are some exceptions to when this debt will be assessed with a tax and one of the most overlooked is “insolvency”. The specific wording is that you do not have to pay taxes on the debt if you were “insolvent immediately before the cancellation”. Generally, if your bankruptcy attorney in Marietta, GA has suggested you file Chapter 7 and you qualify, you are probably insolvent.
Chapter 13 Bankruptcy: Understanding Insolvency
As a Marietta bankruptcy lawyer, I have had instances where a client has to file Chapter 13 to reorganize their debt because they either made too much money or had too many assets to qualify for Chapter 7. When debt is reorganized under Chapter 13 bankruptcy, some of your “non-priority” creditors, such as credit card companies may not be paid in full. Let’s look at this scenario to understand the formula used to determine whether or not the amount that was canceled is subject to taxes:
If you originally owed $10,000 on a credit card and the creditor received $5,000 during your Chapter 13 process the creditor may issue a Form 1099C at the end of the year with $5,000 in discharged debt noted on the form. However, if immediately before the discharge the total of all of your assets was $10,000 and all of your debts totaled $20,000 you may not have to claim the amount on your taxes because you are considered insolvent (e.g., your “assets” are only half of your indebtedness). In addition, there is also an exclusion for any debt canceled on your primary residence, per the Internal Revenue Service (IRS) “qualified principal residence indebtedness” which means if your mortgage lender reduces your overall principal loan through any means you will not be liable for paying taxes on that amount.
As a Marietta bankruptcy attorney, I understand that every debtor’s circumstances are different and that winding up owing taxes on discharged debt can create an additional hardship. If you have this concern when you are filing for bankruptcy, make sure that you discuss it with your bankruptcy attorney and if you should receive a Form 1099C talk to a qualified tax preparation professional before filing. Chances are you will not owe taxes on the amount of the discharged debt.
Whether you are facing challenges making ends meet and are considering bankruptcy or you are uncertain whether bankruptcy is the right option for your current financial situation, contact Roger Ghai, a bankruptcy attorney in Marietta at the Law Offices of Roger Ghai at (770) 792-1000; I will be happy to review your current situation and help you make the right decision for your needs.