Posted by Amanda on January 14, 2013
Have you filed a bankruptcy in the last tax year? In a bankruptcy, debt is discharged, cancelled, or forgiven, and this can have tax implications because it is viewed by the IRS as taxable income to you (Cancellation of Debt Income or CODI).
Bankruptcy and Tax
Common types of debt that are discharged include automobile loans, foreclosures of personal residence, and credit card debt.
IRS Bankruptcy Tax Form
If you have any discharged, forgiven, or cancelled debt from a bankruptcy of an amount greater than $600, the lender will issue you IRS Form 1099-C by January 31 of the following tax year.
Canceled Debt that Qualifies for Exception or Exclusion to Income Tax
- Amounts excluded from income by law (i.e. gifts)
- Cancellation of qualified student loans (must meet certain criteria)
- Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
- A qualified purchase price reduction given by a sellerÂ
- Cancellation of qualified principal residence indebtedness
- Debt canceled in a Title 11 bankruptcy case
- Debt canceled due to insolvency
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
 How to Claim Exclusions
For any exclusions that you wish to claim from the list above, you need to fill out IRS Form 982.
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1 Comment
It is really crazy to learn that forgiven debt is seen as income. I’m sure going though bankruptcy is tough enough to deal with, but having to pay taxes on that money is adding insult to injury.
Filing for bankruptcy can cost $1000’s, and then paying taxes on those debt can cost you even more. It doesn’t really seem fair to me.