In a duel between a tax Form 1099 and a bankruptcy discharge, bankruptcy wins every time.
The prize? no tax on debt discharged in bankruptcy.
So, if you’ve already gotten your discharge, the creditor’s 1099, with your social security number on it, is no threat.
But you do need to file another form to secure the prize.
Bankruptcy is exception to tax
Normally, when an obligation is forgiven, the tax code treats the amount of forgiveness as if it were income. And income is exposed to tax.
But forgiveness in bankruptcy in the first exception to the rule.
Debt forgiven in bankruptcy is not treated as income.
Creditor is clueless
So, if bankruptcy is outside the IRS rule, why are you getting a form 1099?
Because there’s another rule, requiring creditors to report to the IRS, just the way your employer is required to send the IRS your W-2.
And seemingly, the creditor can’t figure out that the reason its claim is worthless is because of the bankruptcy discharge. So it’s easier for the creditor to just send out Form 1099, and make it your problem.
Fixing the 1099 problem
The solution is simple: file IRS form 982.
Title 11 is the part of the United States Code on bankruptcy. Cases are filed under different chapters of that title
This debt is excluded from income because of Discharge of indebtedness in a title 11 case
The IRS provides a set of instructions for filing your “get out of tax” form. Form 982 Instructions.
Other tax consequences of discharge
If you have real property, you may have to reduce your basis in assets by the amount of debt discharged in your bankruptcy.
But thankfully, there is an exception to this rule too: no reduction in basis is required with respect to your principal residence claimed exempt in your bankruptcy case. IRC 1017(c).
Tax action plan
So there you have the skinny on form 1099 and your bankruptcy discharge.
Bankruptcy has other tax implications:
Taxes dischargeable in bankruptcy
Unfiled tax years are never dischargeable
Chapter 13 gets an interest-free tax repayment plan
