Is it legal for a creditor to send a 1099-C for a discharged credit card debt? and is the amount taxable income?

Asked almost 2 years ago - Canton, MI

Since only one creditor sent a 1099-C , tells me it's not the norm, so why send it then?

Attorney answers (7)

  1. Joseph Y Balisok

    Contributor Level 3

    5

    Lawyers agree

    Answered . Generally, cancellation of debt (COD) income is included in a taxpayers income unless it fits within one of the recognized exceptions spelled out in the Internal Revenue Code (IRC).

    One of the explicit exceptions to cancellation of debt income (COD) in the IRC is debt discharged in bankruptcy. That is of course provided that the discharge and 1099 were issued in/for the same tax year.

    If the 1099 was issued for a different year by mistake you must immediately contact the creditor and have them correct their mistake.

    Creditors are typically obligated under the law to issue 1099's for COD income.

    Therefore, discharged COD income is generally not taxable and will not increase your tax burden.

    Simply inform your CPA that you filed bankruptcy in the same year to which the 1099 pertains and he or she will make sure to check the right box on your return and you will not have to pay more taxes.

    Joseph Y. Balisok, Esq.
    1650 Eastern Parkway, Suite 303
    Brooklyn, NY 11233
    Office (718) 928-9607
    joseph@lawbalisok.com

    All information contained herein is not intended to create an attorney client relationship. =====================... more
  2. Matthew Scott Berkus

    Contributor Level 20

    1

    Lawyer agrees

    Best Answer
    chosen by asker

    Answered . 1. Is it legal, yes.
    2. Is it an error, no.
    3. is it required, no.

    If anyone actually reads the instructions and IRS regulations regarding 1099-C's, you will learn that a lender is not "required" to issue a 1099-C on ddebt discharged in bankruptcy, but it is not forbidden from doing so. As such, it is NOT an error.

    A 1099-C is merely a reporting document. All it does is tell the IRS that a potentially taxable event occured. If you recieve a 1099-C, and assuming the debt was discharged in bankruptcy, the debter need only file IRS Form 982, check box 1(a), write the amount in box 2, and bam, no tax liability on discharged debt.

  3. Scott Benjamin Riddle

    Contributor Level 20

    3

    Lawyers agree

    Answered . Your CPA or Tax Account will know how to handle this. Don't ignore it - that'll only get you a bill from the IRS.

  4. Diane L Gruber

    Pro

    Contributor Level 18

    3

    Lawyers agree

    Answered . I have been handling bankruptcies, both Chapter 7 & Chapter 13, for 26 years, and I have never known any of my bankruptcy clients to receive a 1099C on a discharged debt. See your tax preparer ASAP, and take your bankruptcy petition with you along with the discharge notice. Good luck.

    Be sure to designate "best answer." If you live in Oregon, you may call me for more detailed advice, 503-650-9662.... more
  5. Dorothy G Bunce

    Pro

    Contributor Level 20

    3

    Lawyers agree

    Answered . It is not illegal, but it is an error. The IRS requires you to complete an additional form to straighten this out.

  6. Michael Avanesian

    Contributor Level 16

    3

    Lawyers agree

    Answered . This was debt discharged in a bankruptcy? If so, it sounds like an error and you should call them to have it fixed asap.

    If this is for non-bankruptcy debt, then there is no problem and you may or may not owe taxes depending on a lot of things.

    The above is general legal and business analysis. It is not "legal advise" but analysis, and different lawyers may... more
  7. Thomas M. Hensel Jr.

    Pro

    Contributor Level 6

    1

    Lawyer agrees

    Answered . See IRS form 982. You may find this helpful in this situation.

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